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9 Accounting Red Flags to Look Out for in Financial Statements

Posted on by admin
27
Jan

Let’s begin with looking at some obvious and easily recognizable red flags that should make you stop and rethink your decision of investing in the company.

  1. Over-attractive Financial Results
  2. Auditor’s Report to Management
    When a company’s financial statements are audited, the auditor tracks all errors and includes the list under the section ‘Summary of Misstatements’ in the Auditor’s Report to Management. When you are looking at the financial statements of a company, this is an important section to look at. Sometimes, the management can have a different opinion compared to auditors. Hence, as a prospective investor, you must ensure that you compare the reports and identify any red flags.
  3. Unusual Accounting Policies
  4. Changes in Financial Reporting
  5. Anomalies in the Financials
  6. Complex Transactions
  7. Performance-linked Bonuses
  8. Gross Profit Margin Increasing but Sales are Declining
  9. Rising Debtors or Inventory

Remember, red flags are the potential threats that may lie buried deep within the financial statements of a company. While most investors are not chartered accountants or financial analysts, following the points mentioned above can help identify these red flags in financial statement analysis. This can ensure that you don’t make any investment decisions in haste.

Talk to us to get professional advice on Accounting!
Eurogain Consulting Group Sdn Bhd
(Sungai Besi, South KL)
c/o Eurogain Place Building,No 31-4, Jalan Tasik Selatan 3,Metro Centre, Bandar Tasik Selatan,57000 KL, Malaysia.
Tel: +603-9058 1020 / + 603-9058 1050/1080

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