Fundamental Glossary / Management & Corporate Governance
Accounting Red Flags
Patterns in the statements that have often preceded restatements, write-offs, or profit disappointments.
Formula
A checklist, not a ratio: auditor change, qualified opinion, receivables or inventory growing faster than sales, rising related-party balances, frequent one-time gains, capitalised costs, and cash flow that never catches profit.
What it means
Red flags are reasons to slow down. Most of them have an innocent explanation. Several of them together deserve a higher hurdle before you trust the earnings.
The point of a checklist is consistency. Use the same questions on every company so that familiarity does not make you skip them.
How to read it
One flag is a question. A cluster, for example auditor resignation plus receivable stretch plus a large related-party loan, is a reason to stay out until it is explained.
What to watch
Flags are not a short-sale thesis by themselves, and the absence of flags is not a clean bill of health. Fraud that is well hidden will not announce itself in the ratio you happen to check.
This note explains the term. It is not a research recommendation, a target price, or a comment on any security. Ratios and regulatory thresholds change; use the latest filing or circular for a live figure.