FAS 142 strikes again.

In a dramatic series of announcements late Wednesday, Ted Turner said he will step down as vice chairman of AOL Time Warner, and the company posted a loss of nearly $100 billion for 2002. That’s the largest one-year loss in U.S. corporate history.

Helping contribute to that loss: AOL management said the company took a stunning $45.5 billion fourth-quarter charge to write down the value of goodwill and other intangible assets related to the merger with America Online.

The reeling media giant already took a $54 billion charge in the first quarter to write down the value of intangible assets.

To say the least, the much-ballyhooed 2001 marriage of the old media company with the new media company is not looking so hot right now. Results at America Online continue to sag, while Time Warner’s media properties—which include HBO, CNN, and Time and People magazines—performed well.

Indeed, reports continue to swirl that the company’s management team is looking for a way to remove the “AOL” from its corporate moniker.

As for one member of that team: Turner informed chief executive officer Dick Parsons on Tuesday that he had decided to leave. “I have not come to this decision lightly,” he told Parsons.

Turner said he would like to spend more time on his charities.

Still, it seems hard to believe that the ultracompetitive Turner would just walk away from AOL-Time Warner. The man who initially called the America Online-Time Warner merger “better than sex” is still the company’s largest shareholder, with 132.5 million shares, representing a 3.4 percent stake.

The implosion of AOL’s stock has caused the value of Turner’s stake to shrink to $1.9 billion from $6.8 billion.

One rumor making the 24-hour TV news machines is that Turner may try to buy CNN, which, of course, he launched and built into a cable-TV empire. Turner sold CNN to Time Warner in 1996

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Turner’s departure is just another chapter in the mass exodus of key executives at AOL Time Warner, including chairman Steve Case, CNN head Walter Isaacson, and, earlier in 2002, CEO Gerald Levin.

AOL’s $100 billion loss, which is roughly equal to the gross domestic product of Hungary, breaks the record set by JDS Uniphase’s $56 billion loss in 2001.

Rounding out the top five: General Motors (1992), $23.5 billion; Lucent Technologies Inc. (2001), $16.2 billion; and NTL Inc. (2001), $14.24 billion.

Gateway Receives Wells Notice

A bad year for Gateway just got worse.

On Wednesday the computer maker said it received a “Wells notice” from the Securities and Exchange Commission. The notice stems from an already disclosed SEC investigation, which Gateway said relates to matters from fiscal 2000.

A Wells notice gives a company time to prepare a defense against potential action from the SEC. In most cases Wells notices are followed up by charges from the commission.

Gateway’s management said it intends to respond promptly and is fully cooperating with the SEC to resolve this matter. The company also indicated it believes there will be no impact on 2002 financial results.

Gateway has been involved in a bitter dispute with AOL related to new computer buyers who also subscribed to the AOL service.

The computer maker claims AOL unilaterally recomputed payments it had made in 2001 and the first half of 2002 and withheld the claimed overpayments from amounts currently owed to Gateway. The computer maker added it disputes AOL’s retroactive adjustment.

Due to the uncertainty over the company’s ultimate ability to collect the withheld amounts, however, Gateway indicated it reduced 2002 revenues and earnings by the amount of the adjustments. The company’s management added if AOL’s adjustments are appropriate, Gateway also anticipates a reduction of about $3 million to $5 million in future quarterly revenues and earnings relating to company-generated AOL subscribers.

In October, Roderick Sherwood III took over as Gateway’s CFO. He most recently served as CFO of automation-software firm Loudcloud (now Opsware Inc.).

SEC Sues KPMG, Partners for Fraud

It’s official.

The SEC has brought fraud charges against Big Four accounting firm KPMG and four KPMG partners, including the head of the firm’s department of professional practice. The charges stem from KPMG’s audits of Xerox Corp. from 1997 through 2000.

The lawsuit, filed in federal district court in New York, charges the firm and four partners with fraud and seeks injunctions, disgorgement of all fees, and civil monetary penalties.

The commission alleges that KPMG and its partners permitted Xerox to manipulate its accounting practices to close a $3 billion “gap” between actual operating results and results reported to the investing public.

“Year after year, the defendants falsely represented to the public that their audits were conducted in accordance with applicable auditing standards and that Xerox’s financial reports fairly represented the company’s financial condition and were prepared in accordance with GAAP,” the regulatory agency charged.

“The spectacular upheaval in the corporate landscape over the last year highlights the critical responsibility that auditors have in the financial reporting process,” said Stephen M. Cutler, director of the SEC’s Division of Enforcement. “In their audits of Xerox, KPMG and its partners abdicated that responsibility.”

“The investing public counts on the audit profession to do their job with unfailing dedication to the principles of accounting, regardless of the wishes of their audit clients,” said Paul R. Berger, an associate director of the division. “The failure by the audit firm and its partners in the Xerox case represents a troubling episode and one that cannot and should not be repeated.”

The four partners named as defendants are:

• Michael A. Conway, KPMG’s senior professional practice partner and the national managing partner of KPMG’s Department of Professional Practice since 1990. He was the senior engagement partner on the Xerox account from 1983 to 1985. He again became the lead worldwide Xerox engagement partner for the 2000 audit. Conway also is a member of the KPMG board and is chairman of the KPMG audit and finance committee.

• Joseph T. Boyle, the “relationship partner” on the Xerox engagement in 1999 and 2000, and currently a managing partner of the New York office of KPMG and of the Northeast Area Assurance (Audit) Practice. As the relationship partner, Boyle’s chief duty was serving as liaison between KPMG and the Xerox board of directors, including its audit committee.

• Anthony P. Dolanski, the lead engagement partner overseeing Xerox’s audits from 1995 through 1997. He left KPMG in 1998 and is currently the chief financial officer of Internet Capital Group, a public company.

• Ronald A. Safran, the lead engagement partner on the 1998 and 1999 Xerox audits. He was removed as engagement partner at Xerox’s request after completing the 1999 audit and was replaced by Conway. KPMG or its predecessor has employed Safran since his graduation from college in 1976.

According to the SEC’s complaint, KPMG affiliate offices in Europe, Brazil, Canada, and Japan, as well as KPMG auditors at Xerox’s main U.S. operations facility in Rochester, New York, repeatedly warned the KPMG partners that manipulative actions taken by Xerox to bump up revenues distorted the company’s true business results.

Yet the SEC claims the four individuals gave little weight to these warnings from on-the-scene KPMG affiliates. The commission also alleges that the four partners did not demand that Xerox justify the reasons for departures from historic accounting methods.

Although the charged KPMG auditors occasionally voiced concern to Xerox management about the “topside accounting devices” developed by senior corporate financial managers to increase revenue and earnings, the SEC says those auditors did little or nothing when Xerox ignored their concerns and continued manipulating its financial results. The defendants then knowingly or recklessly set aside their reservations, failed in their professional duties as auditors, and gave a clean bill of health to Xerox’s financial statements, the SEC asserts.

“There was no watchdog at Xerox,” stated the complaint. “KPMG’s bark sounded no warning to investors; its bite was toothless.”

Perhaps mindful of the fate suffered by Andersen after it was charged with a crime, KPMG management went on the offensive.

One week after it issued a preemptive defense of its Xerox audits, the accounting giant fired off another statement. In it, KPMG noted: “The action is clearly an injustice to KPMG and the four partners involved, driven, we believe, by today’s charged regulatory environment. The basic issue is the timing of revenue realized by Xerox on its leases and, at the very worst, this is a disagreement over complex professional judgments.”

KPMG management added: “We firmly believe we did the right thing. The action will in no way affect our ability to continue to serve our clients and help restore shareholder confidence in the capital markets, nor our ability to work with the SEC.”

KPMG’s management also refuted a number of the SEC’s charges. It then stressed: “As we have pointed out repeatedly, when we learned of new information in early 2001 that raised serious concerns about Xerox management’s motivation in preparing their financial statements, KPMG refused—in the face of strong client resistance—to issue its audit report on Xerox’s 2000 financial statements. We immediately told the Audit Committee that Xerox must conduct a full-scale special investigation, using outside independent counsel and another audit firm. We cooperated fully, completely and openly with the SEC staff throughout the special investigation and our own expanded audit procedures.”

Obviously KPMG is going to fight this one to the bitter end. The firm might be able to use the demise of rival Arthur Andersen as a primer on how not to defend yourself against government prosecution.

Short Takes

• Switchboard Inc. said the SEC terminated its investigation of the company’s recent restatement of its results for the fiscal year ended December 31, 2001, and fiscal quarter ended March 31, 2002, and that no action has been recommended. Last year the company restated its financials for fiscal 2001, reducing about $2.7 million of revenue and expense attributable to a sale of banner advertising to a single customer, which failed to make a scheduled payment.

• Texas Pacific Group, an $8 billion private equity fund, is looking to raise another $4 billion or so, according to Reuters, citing people familiar with the firm’s plans. The company is known for investing in distressed companies.

• Automatic Data Processing Inc. promoted Karen Dykstra to chief financial officer. Dykstra has been with the company since 1981 and has held various senior financial positions, including corporate controller and vice president, finance.

• Verizon Wireless withdrew plans for a $5 billion initial public offering, citing its strong cash flow and the lack of significant funding requirements.

• General Electric Capital Corp. issued $1.5 billion of three-year global floating rate medium-term notes, led by Barclays Capital and Lehman Brothers Inc. The size of the deal was increased from an originally planned $1.25 billion.