(FORTUNE Magazine) – Are the reports of independent auditors worth the paper they're written on? Is the current system really protecting investors from accounting chicanery? You can't help but wonder in the wake of recent high-profile messes--from restatements to write-offs and losses at Boston Chicken, Sunbeam, Waste Management--not to mention the accounting meltdown that's devastated Cendant. What's so troubling is that short-sellers and accounting gadflies have long questioned the very accounting issues that tarnished the image of each of these companies.

Yet each company's financial statements had been prepared according to generally accepted accounting principles, or GAAP, with the blessings of outside auditors. "It's GAAP" is the standard defense of companies whose accounting is under fire. The management of Media Vision, a former Silicon Valley highflier, used this defense when it capitalized software-development expenses five years ago. (Now the SEC has charged those same execs with insider trading and securities fraud.) Sunbeam also used this defense after its accounting was assaulted by Barron's--it's still sticking to it in the face of an SEC probe of the company's books. Sunbeam's auditor, Arthur Andersen, responded by saying it wouldn't let the company use its most recently audited financial results as part of a bond offering until the company had completed its own investigation. But isn't it a little late for such second-guessing? Arthur Andersen declined comment.

It's clear that something's not quite right in the world of accounting. "It used to be you'd see two, three, four, or five accounting restatements in a year," says class-action attorney Bill Lerach of Milberg Weiss Bershad Hynes & Lerach. "Now you see one almost every other week." Part of the increase is due to tremendous competition among companies to boost results and stock prices, Lerach says. More directly, he traces it to the passage of new securities legislation in December 1995, which made it harder to hold accountants culpable in securities-fraud cases.

In theory, GAAP should have prevented many of the abuses that have been making headlines. But the 133 standards created by the Financial Accounting Standards Board are merely guidelines--and are subject to interpretation. Managers, if they're so inclined, can spin results until the rules are changed. That's where the auditors are supposed to come in. But even officials of the American Institute of Certified Public Accountants say the auditors have to ensure only that a company's financials are in accordance with GAAP. "In their mind, they're not saying whether it's a fair or foul ball," says Howard Schilit, whose Center for Financial Analysis routinely spots accounting controversies.

To be fair, auditors often raise the proper red flags. But when they do, they risk being fired. Look what happened at Think New Ideas, a highflying Internet-marketing company. Its auditors, BDO Seidman, complained about a variety of problems, including account reconciliations not being performed "on a timely basis." Think made changes but fired BDO. The company said the change had nothing to do with BDO's recommendations--it merely wanted a Big Six auditor. (The company hired Ernst & Young.) Perhaps, but the episode is a reminder that the company being audited also pays the auditors' bill. "And that's an immediately obvious conflict," says Paul Miller, an accounting professor at the University of Colorado at Colorado Springs.

I've heard from former auditors who complain about the "horse trading" that routinely goes on between companies and auditors over such things as the size of reserves, depreciation schedules, and other balance-sheet items. "Internally," says one, "we referred to ourselves as 'audit whores,' because we would give our clients any opinion they wanted, provided the price was right. Yes, our procedures were sufficient to detect material misstatements, and we always knew when our clients were cooking the books. However, on most occasions we would just issue and keep our fingers crossed. Anyone who believes that audited financials are golden is living in a dream world."

Auditors insist there are plenty of checks and balances in place, including peer reviews, regular exams, and ethics training. Nonetheless, there are many who propose reforms, including mandatory auditor rotation or an HMO-like organization that would create a group of auditors that would be paid by a fund set up by the companies. Lerach's solution is more severe. He says that auditors should abandon altogether the notion that they are independent. "Let the regulatory system clamp down on them if they allow clients to falsify their books."

Those may or may not be the right solutions, but until something changes, investors need to be wary. Don't look to companies to police themselves--they will continue to take full advantage of the holes in GAAP. And when they do, don't be surprised if their auditors are the last to know.

HERB GREENBERG is senior columnist for The Street.com. His E-mail address is herb@thestreet.com