David Friehling is only the second person to face criminal charges in the Bernard Madoff debacle. He served as Madoff's auditor from 1991 to 2008, though it's hard to say if they'll resume their relationship as cellies. For now, Friehling has only been charged (innocent until proven guilty, and such) with securities fraud, abetting investment adviser fraud and filing false reports with the SEC. On five of the six charges filed, he faces a 20-year maximum.

It's alleged that Friehling didn't conduct "meaningful" audits while in Madoff's employ, despite issuing reports saying that he'd done his job -- which paid close to $15,000 a month (no work for big pay . . . where do I sign up?). In particular, he's said to have not bothered to verify Madoff's business assets, revenue sources or bank accounts. This is no-brainer stuff for an auditor.

The Wall Street Journal reports (subscription required) on the lengths financial institutions went to to get mark-to-market accounting rules tossed out in April, paving the way for them to value illiquid securities at unrealistically high prices -- padding their bottom lines, and potentially adding millions in value to the options held by company insiders.

According to the Journal, "Earlier this year, financial-services organizations put their lobbyists on the case. Thirty-one financial firms and trade groups formed a coalition and spent $27.6 million in the first quarter lobbying Washington about the rule and other issues, according to a Wall Street Journal analysis of public filings. They also directed campaign contributions totaling $286,000 to legislators on a key committee, many of whom pushed for the rule change, the filings indicate."

After Enron, Arthur Andersen collapsed. With a new bombshell allegation about Satyam Computer Services (NYSE: SAY), will its former auditor PriceWaterhouseCoopers (PWC) be next? To be fair, I have not seen any evidence implicating PWC in the Satyam scam. But surely PWC can't have been so incompetent that it did not know what its client was doing.

Satyam's CEO, B. Ramalinga Raju, initially claimed that there was a $1.1 billion shortfall between its reported and actual cash. Now an Indian prosecutor alleges that Raju made up 10,000 employees and then used the money those fake employees would have received (net of taxes and insurance) to buy land through almost 400 companies with fake names -- including that of his elderly mother. The prosecutor also alleges that Raju forged documents related to bank deposits.

You can't make this stuff up! And if these allegations are true, it does make me wonder what PWC was doing to earn its fee. There are some basic things that auditors are supposed to do -- like checking a company's bank deposits and comparing those to what management reports or verifying that the employees who are getting paid actually exist. If PWC couldn't pull off these basics, then it was either incredibly incompetent or in with management on the scam.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

I have been posting so much bad news over the last couple of years that I thought it would be interesting to try something different for a change: look for something that's truly good. If I can find it, I'll tell you what the good news is, why it's important, and what it means for the rest of the world.

The SEC has a big share of the responsibility for the financial catastrophe greeting our 44th president. For example, in 2004 it passed a ruling which allowed financial institutions (FIs) to borrow as much money as they wanted -- which leveraged them up to $30 of debt for every dollar of capital -- and it repeatedly missed opportunities to shut down Bernie Madoff's $50 billion Ponzi scheme.

So it may come as a surprise to note that the SEC has done something right. What's that? It elected to keep an accounting rule that the banking industry was trying to get repealed. It is called mark-to-market and it requires FIs to adjust the value of their assets to reflect those assets' current market value even if they plan to hold them for years. (Ironically, mark-to-market meant the opposite to Enron which used a rule with the same name to record as current revenues potential gains it might make in energy trades 20 years in the future.)

In the accounting business, helping clients improve earnings is not that hard, if you can change the rules. Banks would like the boring green eye-shades to alter how they value assets on bank balance sheets, a pretty nifty way to cut losses without doing anything meaningful to balance sheets.

According to Reuters, "Fair value accounting, which requires assets to be valued at market prices, has been blamed for billions of dollars in write-downs by some U.S. banks and policymakers."

Yes, but wouldn't all their investors like to see how badly banks were managed? How big the gambles were on toilet paper assets like mortgage-backed securities?

While it is fine to sweep the dirt under the rug, the rules are the rules and have been the rules for some time. Changing them now would cause a dislocation in reporting, For 2008, losses may be accounted for under one set of criteria. Next year, that may change. How do shareholders see the actual difference in earnings from one year to the next if the way that assets are valued is changed?

It is always nice to re-write the rule book. Why shouldn't a basketball player who is active now be able to score 100,000 points because he gets credit for a point every time he blows his nose? Just a year or so ago, he actually had to put the ball into the hoop.

Douglas A. McIntyre is an editor at 247wallst.com.

Newt Gingrich has gone on the record with a solution to the crisis that is the best I have seen so far. Rather than pass a $700 billion bailout, suspend the accounting rules that are causing the liquidity crisis to begin with.

In the past few years, accounting rules changed and these changes are in part causing the current crisis. Specifically, the problem is mark-to-market accounting where all assets are required to be valued at current market prices. If the market is temporarily depressed, it can cause an artificial crisis.

Let me give a silly but simple illustration. If you have 20 one dollar bills in your wallet, we would all agree you have a net worth of $20. Thirsty Bob also has one dollar bill in his wallet and walks into the break room and wants to buy a Coke. Soda in the machine costs 50 cents, but it only takes quarters. Thirsty Bob asks if anyone has change and they all say no. Sam says he has only two quarters and will trade Thirsty Bob -- who is really thirsty -- two quarters for a dollar. Thirsty Bob quickly agrees to take Sam up one his offer in order to get the Coke now. Bob knows that two quarters for a dollar is a bad deal, but he is takes the deal anyway.

As if investors do not have enough to worry about, along comes another problem. There is a growing movement to allow, perhaps eventually require, American companies and foreign companies trading in ADRs, to keep their books according to International Financial Reporting Standards, IFRS, instead of the venerable GAAP method we all know and love.

The move to IFRS makes a fair amount of sense given the global nature of capital markets. American investors will simply have to learn to read a balance sheet constructed using different rules. The problem looming on the horizon is, who will construct the IFRS balance sheets?

This post is part of a series on some of the most memorable companies that have disappeared.

Ah WorldCom. Aside from its storied history as one of the world's biggest accounting frauds, I remember it as my first cell phone company. My husband bought me a WorldCom phone as a gift and it turned out to not only have terrible service, but ridiculous billing practices, and we ended up paying to get out of the contract as I recall. I remember thinking that there was something really wrong with that company and later wishing I had pursued it as an investigative story, since I was then a writer at BusinessWeek Online and WorldCom was a hot stock.

But no, I never got onto such a story. In fact, I followed WorldCom's stock with interest since I had picked it in an office stock-picking contest years earlier and felt some satisfaction at its meteoric rise through the 1990s (even though I never actually owned the shares; it was just part of a fantasy portfolio).

But here's the WorldCom history that is worth remembering now: WorldCom started as Long Distance Discount Services (LDDS) in 1983. It changed its name to WorldCom in 1995. A series of mega-mergers transformed the company, culminating in its $40 billion deal for MCI. It was rechristened MCI WorldCom in 1998, the second largest long-distance calling company. The following year, just as it announced a deal with Sprint (now Sprint Nextel (NYSE: S)) that never came to fruition, the telecom industry started a prolonged downturn.

• Shouldn't companies be required to change accounting firms (rather than just employees within the same firm) every few years to avoid entrenchment and cozy relationships. When accountants see colleagues leaving for lucrative gigs at the company they once audited, can that lead to a conflict of interest?

• Should companies be allowed to choose their own auditors, or should the SEC consider implementing a system where auditors are appointed by a third-party? Allowing companies to hire and fire their own independent auditing firms raises questions about whether they are really independent.

Employment agencies are generally a good economic indicator. General Employment Enterprises Inc. (Amex: JOB) specializes in permanent job placements for professionals in accounting, engineering and information technology, all fields where one would expect to find high demand for qualified applicants. General Employment Enterprises revenue is down a bit in both 4Q 2007 as well as FY 2007. Net income decreased slightly, and diluted EPS remained flat at $0.06. Such results do not bode well for national employment trends if companies are reluctant to hire accounting, engineering and IT professionals, even on a temporary basis.

CEO Herbert Imhoff stated that the decline in contract services (temporary employment) revenues in 4Q was an improvement over the larger decline in 3Q. But the fact that companies have fewer slots for contract employees is a troubling sign. CEO Imhoff also stated it is more difficult to find qualified applicants in the company's specialized fields. One would think that the company would have little difficulty finding placements for qualified candidates. This does not seem to be the case. General Employment is opening another office in California to offer both permanent placements and contract/contract-to-hire opportunities. The company is increasing its advertising budget for job boards and telephone marketing in an effort to enlarge its pool of qualified applicants.

The company has declared a special year-end dividend of $0.10 per share for the second year in a row, but that is merely a stop gap measure designed to placate shareholders who are not seeing any appreciation in the value of their investment. The stock currently trades at $1.65 with much room for improvement.