Gateway's Accounting Subject of Criminal Investigation

The San Diego U.S. Attorney's office has added to Gateway's woes by launching a criminal investigation into the computer maker's accounting practices. The Securities and Exchange Commission is also investigating accounting issues at Gateway.

The U.S. Attorney investigation covers financial reporting beginning in fiscal year 2000, as does the SEC inquiry. Gateway indicated that the SEC investigation is expected to conclude during this quarter or next quarter. Both investigations involve Gateway's method of reporting revenue from the free AOL services that come bundled with Gateway computers. Gateway was recording revenue for each free subscription given with a computer sale. Gateway has since changed the way in which it accounts for the free AOL subscriptions.

Gateway got into trouble in 2000 when the SEC began examining the way in which Gateway accounted for the America Online services that come bundled with new Gateway computers. Responding to that investigation, Gateway reissued financial statements earlier this year for 1999, 2000, and 2001, adjusting sales revenue and cost-of-sales figures in those years by over $450 million. Gateway changed the way in which it reported earnings on sales of the AOL services that accompany Gateway's computers.

Both AOL and Gateway have confused SEC investigators with perplexing accounting practices relating to the companies investments in each other. AOL purchased part of Gateway with a $30 million downpayment and promise of future revenues based on joint promotions between the two companies. While AOL booked the $30 million as a one-time fee, Gateway chose to amortize the amount over several accounting periods, thus increasing revenues over those periods. Meanwhile, Gateway agreed to pay AOL $85 million in exchange for AOL marketing Gateway computers. Other collaborations between the two companies are also pending.

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