Red Flags Professionals Watch
Where the numbers quietly lie.
Fraud and aggressive accounting rarely announce themselves. They show up as small inconsistencies across the statements. Here are the signals professionals scan for. Profit up, cash flow flat Earnings booked but not collected. The classic warning. Receivables growing faster than sales Possible channel-stuffing or collection trouble. Inventory growing faster than sales Weak demand or obsolete stock building up. Rising 'other income' Profit propped up by non-core, often one-off, items. Frequent one-off items Every year has an 'exceptional', they're not exceptional then. Falling effective tax rate Sometimes real, sometimes a sign of aggressive accounting. Ballooning related-party deals Insider transactions can move profit around artificially. Auditor or policy changes Unexplained changes near a weak result deserve scrutiny. Rising debt with weak cash flow The company may be borrowing to stay afloat. No single flag proves anything. Each is a question, not a conviction. But several together, especially profit that never becomes cash, is how most accounting problems are spotted before they blow up. This is the summit of fundamental analysis: not just computing ratios, but reading the statements against each other with a sceptical eye. Do this well and you'll understand a business more deeply than the price ever tells you.
Part of Learn NEPSE Investing, a free course on reading Nepali company accounts and charts. Section: The Annual Report.