Red Flags - Introduction
We conclude our five chapter discussion on financial statements with a brief yet important chapter on red flags. Although companies are required to follow generally accepted accounting principles (GAAP), some companies find loopholes and ways to manipulate their numbers. Part of the SOX concept is to have those who create and sign off on financial statements be held responsible for misrepresentation.
These items are crucial for analysts to recognize in order to avoid recommending poor investments to their clients. Prime examples from the last decade were some bad apples like Enron and Worldcom.
The following articles are great resources on spotting the signs of earnings manipulation, learning telltale signs of corporate misdeeds, and how off-balance sheet entities can be misleading:
- Cooking the Books
- Putting Management Under the Microscope
- Off-Balance-Sheet Entities: The Good, the Bad and the Ugly