AOL Time Warner posted surprisingly solid second-quarter earnings on Wednesday. Net income swung to $394 million (€393.8 million) compared to a loss of $734 million a year ago. Revenue of $10.57 billion was up by 10 per cent.

Shares in AOL Time Warner were savaged yesterday, falling 23 per cent yesterday by late afternoon on Wall Street, after the Securities and Exchange Commission (SEC) disclosed that it had begun an inquiry into accounting at its America Online division.

The SEC is sending a fact-finding mission to investigate whether AOL moved money around to inflate revenues in the two-year period to last March.

The world's biggest media company is already in turmoil after a management shake-up, which was seen as a stunning reversal for AOL. The online service's former boss, Mr Robert Pittman, was forced to resign as chief operating officer last week and AOL has been practically relegated to a division of Time Warner.

This has confirmed concerns that Time Warner got a terrible deal when it merged its old media empire of film, television, music, publishing and cable, with America Online's digital service.

Advertising and new subscriber rates have fallen drastically at AOL with the end of the boom in internet stocks, while Time Warner's film and television divisions have performed strongly.

But investors noted that the AOL unit was the poorest performer, with advertising and commerce revenue down 42 per cent, while the old media did well. The film division posted a 26 per cent rise in revenue to $2.39 billion, helped by Harry Potter and the Sorcerer's Stone and Ocean's Eleven in the home-video market.

AOL Time Warner chief executive Mr Richard Parsons said he had called in the SEC after two articles last week in the Washington Post were critical of AOL accounting methods.

The Post cited examples of how AOL, which grew from a small online company to a major advertising force in the late 1990s, inflated its revenue to keep its stock price high as it shaped its takeover bid for Time Warner in January 2001.

However, advertising revenue was beginning to ebb just before the completion of the deal with Time Warner, which had four times as much revenue. The Post alleged that, despite evidence of a decline in online advertising before the merger, Mr Pittman publicly denied that AOL was feeling the effects of the slowdown.

In a conference call on Wednesday evening, Mr Parsons said the company's outside auditors, Ernst & Young, had re-certified its books since the Post articles. He notified the SEC before they were published to offer the company's co-operation.

However, in the light of the collapse of Enron, WorldCom and Adelphia, any suggestion of impropriety is enough to send investors running for cover.

Since the January 2001 much-hyped merger, AOL Time Warner shares have fallen more than 75 percent, as the combination of old and new media failed to justify the wild optimism of analysts.

AOL Time Warner said that it did not break any laws.