One of the new mantras floating above Wall Street these days is, "Don't just rely on what some analyst said. Do your own research."

Certainly not bad advice, in theory. In practice, investors who put on the green eyeshades may wish instead they selected pith helmets and a machete.

The problem lies in the jungle called "generally accepted accounting principles" or GAAP, which are the rules by which publicly held companies report their numbers. Even if accounting rules are followed, the loopholes in the bush are large enough to drive a truck through, in terms of reported earnings per share, said Harvey Bookstein, founding partner and veteran CPA with Roth, Bookstein & Zaslow LLP in Los Angeles.

"In public accounting, you are asked to stretch the numbers," said Bookstein. "You know what the underwriters are looking for, what the management is looking for... it's a game."

The basics of primping the quarterly numbers are pretty simple: Either undercount expenses, or overcount revenues. The devil is in the details. Unfortunately for laymen, it is perfectly legitimate for a company to track revenues on an "accrual" basis. That means, say, if a contract calls for payments based upon events in the second quarter, those payments can be counted as revenues, even if the money never crossed the transom.

An investor performing a careful and knowledgeable reading of the quarterly financial disclosure statements (called 10Qs), and the annual statement (called 10K) might yield clues about financial fancy-dancing, said Bookstein.

For example, a company might actually be suffering from "aging receivables." Every business operator knows the more aged the receivables, the lesser the chance of recouping 100 cents on the dollar. Aging receivables, without an increased write-off of bad debts, is often a bad sign. Usually, aging receivables can be ferreted out in a perusal of 10Qs, in the accounting footnotes although investors should remain aware these valuable documents are typically not filed until either 45 days after the conclusion of a quarter, or 90 days after the end of a fiscal year. In short, by the time a careful investor finishes reading a 10Q, the company's stock could have already tanked.

On the expense side, there are thickets to hide costs behind as well. One subterfuge is to make a portion of employee and management pay a bonus that is contingent on performance. Such an expense is only counted when paid out which means a real expense could be building for a year or two, but never recorded anywhere for investors to see.

"You do not accrue it, because it is not a known liability until the contingent event happens," said Bookstein. In addition, each industry has it own quirks.

In the construction industry, companies can accrue revenues as a project moves along, even if no money is due until the project is finished, said Marshall Mathison, audit partner in Los Angeles with Arthur Andersen LLP, the CPA giant.

"The more you recognize revenues during the project, the bigger (negative) surprise you may have at the end of the project, when it turns out there are no profits," he said. "Maybe the costs were not updated all along also."

For tech firms, research and development costs, which eat at the bottom line directly, are sometimes dubiously categorized as "capital expenses," or investment in productive equipment, and thus amortized or spread out into future quarters, Mathison noted.

Of course, the piper must eventually be paid companies that have juiced their numbers often must restate earnings at some point, when they run out of gimmicks to keep up the facade. That, or they lack the cash flow to pay the rent, wages and debts, and thus tank or get bought out by another company. Either way, restated earnings usually make road kill out of investors.

Given the complexities of modern-day accounting, can even a dedicated investor (who is not a CPA), tackle doing his or her own research?

"Investors today have tons of information, but it is not the information they need," said Bookstein. "If you really get right down to it a layman has no chance to understand what is going on."

Could accounting rules somehow be tightened or simplified, so as to be made useful to the investing public?

The Norwalk, Conn.-based Financial Accounting Standards Board is the keeper of the flame for GAAP, and officials there all but take umbrage at the suggestion their rules are lax enough to invite obfuscation.

"As the world has become more complicated, the financial standards we develop are also more complicated," said Doug Reynolds, practice fellow and spokesman for FASB. "The issue you are raising, of different results through the use of different auditing firms or techniques, is not something we would deal with."

Eichler Cautious

Corporate insiders are selling heavily, even as the Federal Reserve Board cuts interest rates again and again, said Peter Eichler, founder of Westside-based money shop Aletheia Research and Management Inc.

That means a sustained rally on Wall Street is pretty iffy right now. "The movement by corporate insiders to sell their stock certainly doesn't argue for an upturn," said Eichler.

A big fan of following corporate insiders in terms of their stock purchases and sales, Eichler has made up an index, dubbed the Aletheia 100 Index, and an investment fund, which track stocks in which insiders are heavy net buyers. The index is up nearly 25 percent since August 1999, while the broader market indices, such as the S & P; 500 or the Dow Jones Industrial Average, have slogged roughly sideways to moderately down in the same time frame.

In particular, Eichler is wary about the future of Austin, Texas-based Dell Computers Corp., due to large sales by key executives. At Dell, founder Michael Dell, and Morton Topfer, counselor to the chief executive, have been heavy sellers, noted Eichler, even as Dell stock has drifted down in the $25-a-share range, from a peak of $60 last year.

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. His new book is "The Pied Pipers of Wall Street: How Analysts Sell You Down the River," published by Bloomberg Press. He can be reached at

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