In a perfect world, we as investors wouldn't have to question the truthfulness of earnings statements. If reported earnings are going up, that's good. Down, bad. Pretty simple.

But that's in a perfect world. The reality of this issue is that it makes a lot of sense for investors to conduct their own investigations on the stocks they own.

Here are some red flags:

1. Watch out for corporate metamorphosis. A company that's redefining itself could be a prime candidate for future accounting problems. When a company starts remaking itself on the fly, watch it very closely.
2. Keep an eye on inventories and receivables. This is one way to better ascertain a company's financial health. If a company's inventories are rising, especially if it's at a rate that's higher than revenue growth, stuff isn't selling.

An excellent source of stock information may be found online or at your local library, The Value Line Investment Survey.

Sound like too much work? Just remember the Enron tragedy.

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