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.

The "Heard on the Street" column in Monday's Wall Street Journal takes a look (subscription required) at struggling bond and mortgage insurer Radian Group (NYSE: RDN), which reported first quarter earnings of $195.6 million. With a market cap of less than $500 million, the stock looks cheap. But wait! There's more:

Excluding the impact of net unrealized gains on derivatives and hybrid securities, the Company's net operating loss was $215.2 million and the net operating loss per share was $2.69 for the quarter ... Given the significant widening of Radian's credit default swap spread over the past year, the reduction in the valuation of the Company's derivative liabilities related to non-performance risk more than offset the credit spread widening on underlying collateral for the current quarter.

If any of that made sense to you, there's a good chance you didn't fit in real well in high school.

As the Journal explained, "Radian hasn't done anything wrong. It properly applied the new rule and clearly flagged its impact when it reported earnings last week. Others might not be so forthright, meaning investors will have to be even more sharp-eyed as the credit crisis plays itself out."

And that's where many investors are likely to get screwed. The presence of sites that offer pages of ratios and spreadsheets have made looking for undervalued stocks easier than ever. But because those numbers don't include any of the color that lets investors assess quality of earnings -- far more important than the numbers themselves -- anyone who buys stocks based on the ratios without reading the underlying SEC filings is likely to find himself (And yes, only men would invest money based on such shoddy analysis) in a world of hurt.

Moral of the story: use services like AOL Key ratios pages as starting points for research. But never, ever, ever take those numbers at face value. Log-on to Sec.gov and read the filings yourself. I don't even want to think about how many millions of dollars naive investors have lost basing trades on a cursory glance at key ratios.

To learn more about digging into the numbers and assessing earnings quality, check out the great Thornton O'Glove's Quality of Earnings: The Investor's Guide to How Much a Company is Really Making.

An independent report commissioned by the Justice Department concluded that the "improper and imprudent practices" of now-bankrupt subprime lender New Century Financial were condoned and enabled by the company's independent auditor, KPMG.

The accounting firm allowed New Century to change its accounting to report strong profits during the housing boom, when a more conservative treatment would have shown losses. The company lowered its reserves for bad loans that investors were forcing it to buy back, even as the number of bad loans increased.

The New York Times reports that this may pave the way for New Century to sue KPMG. Seven years after the collapse of Enron, conflicts of interest involving "independent" auditors and their clients who pay them are still costing shareholders billions. Back in October, I posed 2 ideas for ways that issues of auditor independence might be fixed:

• 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.

With a recent -- and idiotic, I would say -- Supreme Court decision making it tougher for defrauded investors to sue investment banks and auditors who aided and abetted in fraud, auditor independence may be more important than ever.

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.

You have to stand in awe of the print media's desperation to reverse its decline. Having realized that newspaper circulation is destined to decline indefinitely, they've found a new way to report growth: Change the way you report your numbers! According (subscription required) to The Wall Street Journal:

Circulation at the nation's biggest newspapers slid again in the latest six-month period, by an average of 2.6%, a sign of continuing defection of readers and advertisers to the Internet.

But in an attempt to draw attention away from the sagging circulation data, the industry is trying to highlight a new measure: the total number of online and print newspaper readers instead of simply the number of print papers delivered everyday.

But the advertising industry isn't buying it: "This is helpful information, but we can't just rely on readership and audience," said Merle Davidson, director of Media Services at J.C. Penney Co. "Print circulation is still very important."

Of course it is. That's because newspapers that trumpet their online readership are competing in a whole different space -- against websites, including BloggingStocks.

The industry has essentially changed its "accounting" to try to portray the state of the business in a different light. If this sounds like what some of the great accounting frauds did, that's because it is.

Of course, this isn't fraud, because everything is disclosed. It's just desperation.

After being embarrassed by the collapses of Enron and Worldcom, the auditing industry appears to be growing a stronger backbone when it comes to dealing with aggressive clients. According to (subscription required) The Wall Street Journal, "In recent weeks, the accounting firms, operating through a new industry group, have taken views at odds with at least some of their clients about the use of market prices for hard-to-trade securities and over how banks should deal with their exposure to losses in off-balance-sheet lending vehicles."

This is certainly good news. Strong, independent accountants are an absolute necessity in preserving the integrity of the financial system. But more needs to be done. Investors and regulators need to be asking the following questions:

• 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.

I've been writing about the concerns over accounting at some of the big investment banks of late -- how they're valuing illiquid CDOs, and whether they're taking excessive write-downs to create cookie-jar reserves to boost future earnings.

Fortune reported that Goldman Sachs' (NYSE: GS) blowout quarter "benefited from large gains in hard-to-value financial instruments, and its trading results in the period were particularly volatile, according to data contained in a Goldman filing of quarterly financial results with the Securities and Exchange Commission."

All of this discussion of accounting gimmickry and companies being able to essentially make up their earnings because they got to value their own illiquid assets reminded me of one thing: Enron. In a post on Sunday, BloggingStocks' own Peter Cohan referred to Hank Paulson's Enron-like crisis.

But wait -- didn't the reforms in the wake of Enron take care of all these problems? Isn't the off-balance sheet accounting that buried Enron's accounting woes a thing of the past?

Several banks have been taking big write-downs related to subprime loans lately, and many of us have been applauding their conservative, prudent accounting. Their stock prices have responded well, with investors betting that the worst is over, and glad that the companies have come clean.

But The Wall Street Journal's Heard on the Street column [subscription required] has a different take: "At the same time, some investors are wondering whether banks are being so conservative with their accounting that they will quietly book profits down the road as the securities they still hold rebound in value. Fans of accounting scandals know this as filling the cookie jar. Later, the cookie jar is emptied, giving earnings a boost when needed most."

It seems plausible. Investors have been fretting for months over the subprime debacle, and most on the Street have been expecting sizable write-downs. Many have been willing to give the banks the benefit of the doubt, writing off this quarter just as the banks are writing off their loans.

The problem is that the banks know investors are thinking this, and realize they can probably get away with writing down a little bit more, without their stock prices taking a corresponding hit.

This idea of cookie jar accounting is hardly new -- to learn more about it and other tricks companies use to boost their financial statements (or hammer them temporarily in this case), check out Financial Shenanigans.

The Supreme Court is currently deciding whether accounting firms, investment bankers, lawyers, and others can be sued for corporate failures related to accounting fraud. The outcome of the case will have huge ramifications for former shareholders in companies like Enron, who are pursuing class-action lawsuits to recoup losses from companies affiliated with the former trading giant that imploded in a wave of accounting scandals.

According to The Financial Times, "The business community wants the court to protect US and foreign companies -- along with accountants, lawyers and investment banks -- from a new wave of costly investor lawsuits. What they would regard as the wrong ruling in the case could frighten foreign issuers away from US markets and dissuade overseas groups from doing business with US corporations, business groups say. Investor advocates say that if they lose the case, victims of corporate fraud -- including those who suffered in the Enron debacle -- would find it hard to gain compensation."

It's generally impossible for shareholders to collect money from the companies they lost money investing with -- If the companies were solvent, they wouldn't need to collect money.

The issue to me is that lawyers, accountants, and investment banks are paid huge fees to perform due diligence and, if they fail to detect a fraud, they have failed to do their jobs! If these people can collect such huge fees for doing the work they do, shouldn't it stand to reason that they ought to give some back when they mess up badly?

I should be hesitant to admit this on a financial blog, but there's really only one reason that I've never purchased shares of an investment bank on my own, outside of those that I own through an index fund: The financials are often very complex, and difficult for me to understand with the level of depth that I like to have before I make an investment.

Apparently Fortune's Peter Eavis agrees with me, at least on the most recent numbers. Lehman Brothers Holdings Inc. (NYSE: LEH), The Bear Stearns Companies Inc. (NYSE: BSC), and Goldman Sachs Group, Inc. (NYSE: GS) all booked substantial gains from hedging bets/shorting mortgage bonds. Eavis asks thought-provoking questions, one that I somehow doubt many of the investors who have been pushing shares of these stocks up in recent weeks have bothered asking:

How, for instance, can it be that the three firms were able to rack up large gains by betting in the same direction? Were these bets made in liquid markets where prices are dependable and positions can be sold quickly? Or were they made in illiquid markets where brokers have to make their own estimates about what the bets are worth - and where it may be difficult to exit?

Very interesting. For now, the earnings for Bear Stearns appear to be somewhat of a "black box", exactly the way one analyst described Enron in March of 2001. At the time, Goldman Sachs analyst David Fleischer disagreed: "Enron is no black box. That's like calling Michael Jordan a black box just because you don't know what he's going to score every quarter."

Of course, I'm not suggesting that any of these firms are involved in any kind of fraud. But one of the most important, and most neglected, questions to ask before investing in a stock is "Do I really understand the earnings?"

In the case of these firms, I sure as heck don't, and so I'll stay on the sidelines.

A recent study by a trio of accounting professors reached a conclusion that many of us have suspected for a long time: The practice of "earnings management" is commonplace in corporate America.

By looking at economic growth from 1962 through the first quarter of 2004, they calculated the approximate number of companies that likely would have achieved 20 consecutive quarters of earnings growth. Their number? 46.

The actual number of companies that achieved that feat? 587, leading the professors to suggest "prima facie evidence of earnings management."

Worried? According to The New York Times, Professor Douglas Skinner, one of the study's authors "also stressed that earnings manipulation does not have to involve outright fraud. It could involve something as innocuous as postponing spending on research and development in order to avoid reporting a loss in the current quarter."

So is this really a big deal? I would argue that it is. At the very least, earnings management amounts to a waste of time and energy, and tactics like postponing R&D expenses can be harmful to the long-term future of the company.

At worst, the leap from earnings management to outright fraud may not be that big. But until Wall Street can get over its obsession with quarterly earnings numbers, it seems like "earnings management" will be here to stay.

If you've ever read one of Herb Greenberg's investigative columns on companies like Novastar Financial Inc. (NYSE: NFI), Krispy Kreme Doughnuts (NASDAQ: KKD), or Overstock.com, Inc. (NASDAQ: OSTK) and wondered "How does he figure all that stuff out?", then Financial Shenanigans is the book for you.

Written by Howard Schilit, a leading authority on accounting fraud and American University Professor, this book takes a look at some of the most common ways companies manipulate their financial results: recording revenue too soon, recording bogus revenues, boosting income with one-time gains, shifting current expenses to a later period, failing to disclose liabilities, shifting current income to a later period, and shifting future expenses to the current period.

Schilit uses quick examples from numerous companies, including L.A. Gear, Crazy Eddie, Jiffy Lube, and MDC Holdings. Rather than providing detailed accounts of the stories behind each company, he highlights one or two ways that they used financial shenanigans to mask the true results of their businesses.

Even if you don't want to be an armchair financial detective, this book will make you a more critical analyst of financial statements as you look for companies to invest in. It's very readable and contains a nice introduction to accounting in the back, making this a book that might actually be an ideal introduction to to reading financial statements: and certainly a lot more entertaining than most others.

You can get a copy used on Amazon for less than $3.

Intuit (NASDAQ: INTU) has made a fortune by selling easy-to-use and affordable accounting software for small businesses. But competition is heating up -- which is, no doubt, a great benefit for customers.

The latest entrant is NetBooks, which recently raised about $9 million in a Series A round. The investors include CMEA Ventures and Integral Capital.

Developing accounting software is extremely complex. As a result, it took NetBooks about four years to create its offering. Interestingly enough, the company's founder, Ridgely Evers, was the mastermind of Intuit's QuickBooks.

With NetBooks, a small business can accomplish things like sales management, customer relationship management (CRM), vendor management, and so on.

And since it uses an on-demand approach, NetBooks is fairly easy to implement and does not require large information technology (IT) expenses.

But the big test will be the upcoming IPO of rival NetSuite. If it's a success, I think we'll likely see more companies like NetBooks hit the market.

If you want to check out more venture fundings, click here.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements.

The always-insightful Herb Greenberg raises an interesting point in his latest Weekend Investor column for the Wall Street Journal: "Face it: Nobody cares much about accounting scandals anymore."

He uses the situation at International Rectifier (NYSE: IRF) as an example. After the company reported that it had fired its chief financial officer, the stock went up. The shares are currently trading at about the same price they were at before the company reported "accounting irregularities" on April 9.

Investors may have be correctly predicting that the accounting issues aren't huge -- any restatement of earnings may not be material enough to effect the value of the company.

But that's not really the point. As Greenberg writes, "Still, the market's indifference to possible fraud, no matter the size, is astounding -- especially since, at times, aggressive behavior reflects a company's culture."

Now that is precisely the point. I'm with Jim Cramer on this one: When a company's CEO or CFO resigns unexpectedly, sell the stock. If a company announces "accounting irregularities" and the stock doesn't tank on the news, take it as an opportunity to get out: Shooting first and asking questions later would have saved investors a lot of pain at companies like Enron, WorldCom, and, for you history buffs out there, Zzzz Best and Crazy Eddie.

The market appears to have developed an indifference to early warning signs of fraud, and that inefficiency could provide savvy investors with a chance to hop off the bus before it heads into a ditch.