Time to read the fine print? Heres a part from the article..
accounting tricks to watch for
It's getting mighty difficult for small investors to pick stocks these days when even pros trained in scrutinizing balance sheets are getting snowed by the likes of Enron.
"It's the old dilemma: Reveal vs. conceal."
And here's the kicker: If a company is bent on fooling investors and Wall Street, there's little one can do to detect it, experts said.
1. Earnings are rising, but cash flow is flat or declining. When a company's profits are going up, its cash flow should be moving in tandem
It's important to remember that earnings are not the same as cash flow.
Cash flow, however, only measures the money going in and out of a company.
A company could ship more goods to retailers than they ordered and book it all as sales. This inflates revenue, resulting in higher profits on the income statement - but not cash. Instead, these extra products appear as an increase in accounts receivable - bills a company expects or hopes its customers will pay.
"It's very common, especially in the tech world," Sellers said.
Check Securities and Exchange Commission filings - the 10-K for yearly and 10-Q for quarterly reports - at Freeedgar.com for a company's cash flow and income statements, as well as balance sheet.
2. Sales or revenue per employee soars. A good way to find out if a company is inflating the top line is to calculate the total sales or revenue per employee
The figure will vary by industry, but a general rule of thumb is to suspect any number over $500,000 per worker, he said.
An ever-climbing sales per employee number shows that a company's business might be booming but it hasn't hired more workers in proportion to handling the extra load. Be wary.
3. Boosting earnings from an "over-funded" pension plan.
A company that's desperate to boost earnings can, for example, increase the expected rate of return - which will result in a larger value for the pension plan.
As a result, the firm just saved some extra money - boosting profits.
4. Taking too many "extraordinary" or "non-recurring" gains or losses.
So the firm will "write off everything but the kitchen sink," he said.
5. Suspicious "related-party transactions" It's smart to read the footnotes in a company's financial reports pertaining to "related-party transactions," Sellers said. You might be surprised at what you find. Verisign (VRSN: news, chart, profile), for one, allegedly boosted sales by investing in a small start-up business that turned around and used the cash infusion to buy products and services from Verisign, he said.
Deborah Adamson is a reporter for CBS.MarketWatch.com in Los Angeles.
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