It is similar to the lawyer for the defendant in a trial. It is his or her job to present the defendant in the best possible light.

What can we do as members of the general public to avoid investing in companies where the management has stepped outside the law in presenting their accounts? Or, if they have not gone that far, they have presented such a distorted picture that it is impossible to get a reasonable picture of the financial health of the company.

Be warned: Again, back in 1934, Benjamin Graham had good advice warning that if there was anything questionable in the accounting figures, then “all its securities must be shunned by the investor, no matter how safe or attractive some of them may appear”. Others have said the same thing. Example: WorldCom.

New Measures of Success: Be wary of companies that talk about new ways of measuring their success. For example, the number of people on their database (Amazon.com) or “soft” accounts measures (EBIT).

Companies in the news: Substance not publicity

Huge growth: Based on what?

Obscure footnotes in the financial statements: Buffett wrote that if you can’t understand a footnote or other managerial explanation, it’s usually because the CEO doesn’t want you to.

Management making sales and earnings forecasts: Beware of companies with management that are continually making statements about what the growth of earnings will be. Or about what the share prices should be.