Time Warner has intensified its check on accounting adequacy at internet subsidiary America Online. The investigation centers on the period prior to and following their ill-fated merger in 2001.

The media giant has launched an internal investigation into a series of transactions at the European division of AOL to determine whether losses incurred by the unit were incorporated into AOL's own financial results.

In the run-up to the Time Warner-AOL merger, AOL Europe's parent companies Bertelsmann and AOL both needed to reduce their ownership to below 50% to satisfy EU and US accounting rules.

This was neatly achieved by each parent selling a 0.5% stake to Goldman Sachs, a transaction incorporating a 'get out' clause for Goldman that enabled it to sell back its stake to AOL at a set time and price.

But things weren't as simple as they seemed.

Not only was the deal not disclosed, AOL – temporarily no longer a majority stakeholder -- reported its results separately from those of AOL Europe, thus concealing significant losses of up to $200 million (€166m; £110m). And Time Warner may not have been so keen on the merger had it known that AOL's assets were less than healthy.

Such accounting maneuvers are highly embarrassing for the company, which may yet again have to to restate its earnings following the outcome of the investigation.

Data sourced from: The Washington Post Online; additional content by WARC staff