AOL's Non-Financial Metrics Add Fuel to Reporting Debate
The media has speculated that the investigations  by SEC and DOJ focus on reported advertising revenues, rather than subscriber revenues. AOL says it accounted for these transactions properly and it has confirmed with its outside auditor (Ernst & Young) that its accounting conforms to generally accepted accounting principles (GAAP).
Although the subscriber base may be every bit as important to analysts as the revenue figures, non-financial disclosures are not covered by GAAP and conventional audits, leading some skeptics to challenge the numbers. A key area of concern is the percentage of AOL's 35 million subscribers who are on free trial memberships.
AOL Chief Financial Officer Wayne Pace recently provided a breakdown of the U.S. subscriber base into paying vs. non-paying customers. As suspected, a significant portion is classified as "under free trial." Another sizable percentage pay a lower price for their monthly service or get deals (such as a free one-year membership) after buying their computers. But analysts are still seeking similar breakdowns for the company's European, Asian and Latin American operations.
The clamor for more information about AOL's non-financial metrics helps to fuel the debate about future reporting. Key questions: Should companies be required to disclose how many customers they have? Should there be a reporting standard that defines customers as paying customers? Who should set the disclosure requirements and standards? Would there be a benefit in requiring companies to obtain assurances on disclosures about non-financial metrics?