In rating a company’s quality—the very first step in deciding whether it is even a candidate for your investment dollars—management trustworthiness is a mandatory litmus test.

The Sensible Stock investor seeks unquestionable integrity of management. Here are examples of situations that should paste a big red flag on any company:

• Companies being sued on antitrust grounds.

• Companies that produce unsafe or harmful products and attempt to deny or evade responsibility.

• Companies that admit lying or misleading the investing public in any way.

• Companies whose reported financials are questioned, or which have a reputation for “aggressive accounting.”

AES falls into the last category. First, it can’t seem to get a handle on its own numbers. For two years in a row, it has had to delay or restate its financial results. In my book, that makes them “untrustworthy.” I don’t mean this in a personal way. They may all be good, honest guys there at AES. They may simply be incompetent. Their intent (whether to be honest or misleading) is not the issue. The real issue is, can you trust their numbers? Clearly you cannot. If I were evaluating this company for possible investment, I’d save myself some time and toss it out as soon as I ran across this information.

Note also that AES has a potential second problem: It may have a stock option back-dating issue. The admission of options-backdating issues—which are sometimes innocent but are often outright fraud—has become almost epidemic over the last year or so. Because the practice was so widespread, perhaps it shouldn’t be considered a trustworthiness issue.

But then again, not every company that issues stock options backdated them. Backdating options, after all, moves money out of shareholders’ pockets and into the pockets of management or board members. It is lying to shareholders. If management lies about that, what other subjects might they be misleading you on? New products? New markets? Operational improvements? How can you know?

With what kind of company would you rather place your bet? A company which effectively cheats its owners out of some of the profits to which they are entitled, or one that keeps its owners’ interests foremost? The question answers itself.

Some indicia of untrustworthiness are easily found in public records. Has the company had a formal SEC investigation in the past year or two? Has it repeatedly taken “one-time” charges year in and year out? Has it recently restated earnings? Has its CEO or CFO resigned under questionable circumstances?

Depending on your point of view, an entire spectrum of factors can lead you to question a company’s integrity. For example, Microsoft was adjudged in court decisions to have used illegal tactics repeatedly and over a long period to preserve its monopoly in PC operating systems. Years after that issue first came to light, the company is still fighting these charges in Europe. You may consider this proof of a lack of integrity and refuse to invest in Microsoft for this reason alone.

For another example, consider Daimler-Chrysler: At the time of the “merger” of Chrysler and Daimler-Benz, Jurgen Shrempp (CEO) said that there would be equality of the companies after the merger. Shrempp later retracted these statements, publicly acknowledged that he had misled, and appointed a German to head Chrysler. Many of Chrysler’s executives left the company as the truth of the situation emerged. So did a lot of investors: From early 1999 to early 2001, the stock dropped 50 percent. Now, in 2007, Chrysler is no longer one of the "big three" automakers, and it is reportedly on the sales block. As Dr. Phil might ask, “So, how has that worked out for you?” Evidence of lack of integrity was there from practically the beginning of the acquisition by Daimler-Benz.

Back to AES. Questions abound: Will AES ever be able to get a handle on its accounting? Can any of its reported numbers be relied upon? Has the company committed intentional fraud with its options practices? Does anybody there know what they are doing? Does AES’ board have a clue?

With questions like these, why would anybody entrust their hard-earned money to buying AES stock? The Sensible Stock Investor certainly should not.

Dave Van Knapp is the author of "Sensible Stock Investing: How to Pick, Value, and Manage Stocks." Lack of management integrity is but one of several factors that a Sensible Stock Investor should beware of prior to investing. The entire list is covered in the book.

"Sensible Stock Investing" is 5-star-rated by Amazon.com readers. Learn more about it at http://www.SensibleStocks.com .