"Barter became so maligned that the July 2001 edition of Harvard Business Review proclaimed them "minefields." The article stated that companies still brazen enough to report barter as revenue were "more likely to feature manipulation of company accounts." "Companies in new industries, such as those in the Internet sector, may engage in business transactions that were uncommon in the Old Economy, such as the advertising barters popular among Web sites," the article, by David S. Young stated. "Accounting standards, which tend to be anchored in the Old Economy, may be silent, or at least ambiguous, on important transactions, thus providing corporate managers with considerable scope for manipulation." Barter deals are not illegal if they follow rules outlined by the Financial Accounting Standards Board (FASB), which has implemented specific guidelines for online advertising barter agreements. According to the FASB's Emerging Issues Task Force No.99-17, companies are allowed to count barter transactions as revenue as long as they value the ad swap like a typical cash deal. In other words, companies can book barter deals to boost revenue if they account for the swap as an expense as well. The FASB requires companies that sell advertising on a regular basis to determine the value of the barter based on its existing advertising rates. That's an attempt to prevent companies from rates based on arbitrary measurements. "Barter is legal and generally accepted," said Safa Rashtchy, an analyst at US Bancorp Piper Jaffray. "It's OK as long as you take care of the expense side." The FASB rules also allow securities to be swapped for advertising, which many companies have done. However, reporting the equity sales as advertising revenue remains controversial. A number of companies have already come under scrutiny for allegedly pushing the limits of what's considered sound bartering agreements and what could be construed as misleading. Companies that allegedly failed to balance revenue from barter with equal reporting on the expense side have come under investigation by federal regulators, as have deals that traded advertising space for ownership stakes. In October 2000, online retail giant Amazon came under informal inquiry by the SEC for deals in which it traded advertising for equity. Some investors filed a class action lawsuit alleging the company failed to disclose its barter agreements were equity deals, not deals where cash changed hands. Amazon played down the inquiry, telling investors that its accounting remained conservative. The SEC settled one case against Amazon and retailer Ashford.com with fines. A class action lawsuit is still pending against Amazon, alleging the company did not report its advertising deals with start-ups were based on equity instead of cash. In February, online marketing company L90 became the target of an SEC inquiry because of its connection to barter. The SEC is investigating the Los Angeles-based company's deals with Homestore and others, and the investigation sparked L90's audit committee and board of directors to conduct an internal investigation. The internal probe, which concluded in May, resulted in a reduction of revenue for 2000 and 2001 of approximately $8.3m. It also caused Los Angeles-based new media company eUniverse to back out of an L90 acquisition, which was planned for 21 March. Some companies, such as Yahoo!, kept their reliance on barter deals below 10 percent of revenue. Others relied on it much more heavily. Women's site iVillage and Latino site Starmedia disclosed that at one time, barter transactions accounted for 20 percent to 35 percent of their overall revenues. Starmedia in 2001 was forced to restate its earnings to account for revenue that should have been considered barter, among other accounting improprieties. Beyond new media Questions about barter go beyond dot-com media companies. Global Crossing filed bankruptcy documents in the spring showing that the fiber-optic networking giant inflated sales by altering a $30m deal last year with sports marketing company IMG Worldwide. Under the February 2001 deal with IMG's online division, TWI Interactive, the companies agreed to exchange $15m over five years. TWI wanted Global Crossing to provide Web site management, and Global Crossing wanted TWI's advertising and marketing services. TWI originally wanted a straight barter deal with no cash exchange, but Global Crossing required an equal exchange of cash, according to documents submitted by TWI. At the time, executives at Global Crossing were closing deals with other companies that involved similar swaps but also required cash exchanges, booking revenue from the transactions over the life of the contracts. For AOL, the key issue is whether the media giant inappropriately accounted for its advertising revenue. In a series of reports by The Washington Post, AOL allegedly reported equity sales as ad revenue. Most Internet companies at that time witnessed their online advertising revenues plummet, but AOL Time Warner executives maintained the online giant's business was stronger than ever. The reports also alleged that other improprieties included bartering ads for computer equipment and shifting revenue from other divisions to boost ad revenue. Some investors are getting edgy. On Monday, New York law firm Kaplan Fox filed a class action shareholder lawsuit against AOL Time Warner alleging that company officers misrepresented the dour situation of AOL's online advertising business. The suit further alleges that AOL artificially boosted its advertising revenue from one-time investment gains. The lawsuit cited the Post reports to bolster its claims. AOL Time Warner management has said accounting firm Ernst & Young re-reviewed all of the deals outlined in the reports and confirmed that the transactions were in accordance with accounting standards. At the center of the recent AOL inquiry is its deal with PurchasePro. The online giant took a stake in PurchasePro in exchange for selling advertising for the company but accounted sales in PurchasePro stock as advertising revenue, according to reports. Equity sales should be booked as one-time investment gains instead of revenue. It is now up to the Justice Department and the SEC to determine whether or not AOL's accounting methods for those deals were improper. While barter is figuring more prominently in regulatory inquiries, some analysts downplayed the current concerns, saying they believe the worst may be over. "There was a ton of focus on barter deals on the Internet," said Derek Brown, an analyst at WR Hambrecht. "Many companies that we're talking about faced the music some time ago. I suspect to a large degree those issues may already have been addressed in investors' minds." News.com's Rachel Konrad contributed to this report.
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