Old Companies' Accounting Sins Will Haunt Young

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You can't fake revenue growth. At least that's what we thought. When I analyzed companies at the hedge fund and when I look at them now, I always start with revenue. I start with revenue because, as we all came to know, there are so many ways to fudge earnings that I simply stopped caring that much about earnings growth. Or to put it another way, earnings, and companies' abilities to massage those earnings, always made me skeptical about the real underlying growth.

So we relied on revenue. Now it looks like that, too, was a mistaken approach, because companies made up false revenue all of the time and they either won't be flagged by accountants or were well-hidden by financial officers and salespeople.

The revenue recognition problems we have seen at L90 (LNTYE - commentary - Cramer's Take), a once-hot dot-com concern, CMS Energy (CMS - commentary - Cramer's Take), Reliant (REI - commentary - Cramer's Take) and, of course, Enron, remind us again that investing has become more difficult, more problematic, in equities because of the lack of enforcement against bad actors at the corporate level.

Let's hope that renewed scrutiny, the kind that we are getting in spades now from the perhaps too-maligned Securities and Exchange Commission, changes that. Until then, investors will have to fall back on other benchmarks of corporate valuation: the quality and demeanor of its executives and the integrity of well-established companies with long histories of steady growth from real operations that we can touch and feel and perhaps eat, smoke and drink.

And all the innovative newer companies, the ones we measured with revenue growth will now have to suffer the consequences of having no track record in ethics to scrutinize. In other words, capital formation for new growth companies is going to take a real beating until these government probes run their course.

Random musings: The CMS investigation is just so horrible. These guys didn't need to do what they're accused of; they were solid managers doing a good job. But they might have gotten the bug, I guess, and couldn't resist the "congratulations, gentlemen" and the higher stock prices that come from beating the numbers. ... This Edison Schools (EDSN - commentary - Cramer's Take), a danger zone pick on my radio show, really is collapsing. I wouldn't bet with these guys. ... Don't forget, all this week I am giving out an autographed copy of my new book, Confessions of a Street Addict, to listeners whose questions I read during the "fixing your 401(k)" section of my radio show. Just email your questions to me at [e-mail], and you could get it answered on the air. Or, if you can't wait, click here to order your own copy now.

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James J. Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for Action Alerts PLUS by clicking here. While he cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to [e-mail]. Click here to get Cramer's book, "Confessions of a Street Addict."