Forensic red flags

The recurring patterns that separate accounts worth trusting from accounts worth investigating. None is proof. Two or three together, pointing the same way, usually are.

The list that earns its place is short. Operating cash flow persistently below net profit. Receivables or inventory growing faster than sales for more than a year. A rising share of profit from other income. Frequent exceptional items. Related party balances that never settle. Promoter pledging that keeps increasing. An auditor who resigns, or a qualification that repeats. Cash sitting on the balance sheet while the company borrows at high rates. And a subsidiary structure more complicated than the business needs.

The last one is worth its own sentence, because complexity is not an accident. Structures are built by people, for reasons, and a group with forty subsidiaries running one business has told you that somebody wanted the money to be hard to follow.

Score the flags, then go and read the notes that produced them.

One flag is noise. Three is a finding.