Investors are right to be concerned, according to the National Association of Online Investors. Because corporate financial reporting is guided by a broad set of generally accepted accounting principles, companies may legally exercise much latitude in making their stock look more attractive than it really is, according to Leland Hevner, the NAOI's president.

"For the first time, the public widely understands that there is a lot of wiggle room in accounting practices," Hevner said. Because "executive compensation packages are largely based on stock options, executives have a great incentive to help boost stock prices."

But companies are not required to show stock options given to executives as an expense on their books, Hevner said. Another way that companies can manipulate their financials is by front-loading the entire revenue stream of a long-term contract - whether or not the company has received payment or even performed the service.

The NAOI recently came up with a list of red flags average investors can watch out for to help avoid getting caught in a maze of fuzzy accounting. It's a good list to consult in this season of earnings reports, annual shareholder reports and proxy statements. As a shareholder, you will receive all of these. Read them.

One thing to look for, Hevner said, is companies with high relative debt.

If a company's debt is much higher than the industry average or appears to be steadily increasing over past years, that could point to trouble. A company could be spending too much or making investments without having the demand to offset it, as was the case with the doomed Global Crossing.

Investors may want to spend time reviewing a company's cash flow statement, which, according to the NAOI, is the most difficult of a company's financial statements to "cook."

But just reading the major financial statements may not be enough.

The NAOI advises that investors also read the financial statement footnotes, where companies often bury unsavory information about long-term purchase commitments, pending litigation or changes in their own accounting methods.

The oft-ignored proxy statement often contains details on executive compensation and perks and other contingent obligations.

www.nypost.com