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:

Managerial Discretion


Related Articles
  1. Personal Finance

    Detecting Financial Statement Fraud

    Find out how to tell if a company is manipulating its financial data, so you don't invest in the next Enron.
  2. Chart Advisor

    Bullish Flag Formation Signaling A Move Higher

    Find out which stocks are trading within a bullish charting formation
  3. Chart Advisor

    Bullish Charts To Watch

    Bull flags are starting to appear in many stocks.
  4. Chart Advisor

    Oil Stocks Poised To Pop?

    Oil Stocks Poised To Pop?
  5. Investing Basics

    How Financial Statements Are Manipulated

    Financial statement manipulation is an ongoing problem, and investors who buy stocks or bonds should be aware of its signs and implications.
  6. Chart Advisor

    Recent Flag Pattern Breakouts

    A flag is a small continuation pattern, and these four stocks recently broke out of one, or are close to it.
  7. Investing

    Off-Balance-Sheet Entities: An Introduction

    The theory and practice of these entities varies greatly. Investors need to learn what they're getting into.
  8. Investing

    Cooking The Books

    To spot the signs of earnings manipulation, you need to know the different ways companies can inflate their figures.
  9. Home & Auto

    6 Neighborhood Red Flags

    There are some qualities you can’t discover about a neighborhood until after you’ve moved in. But there are ways to scout out red flags ahead of time.
  10. Investing

    The Next 48 Hours Are Critical To Your Financial Future

    Today could be critical to your financial future. The red flags I'm seeing right now are eerily similar to what I saw before several major corrections. If my hypothesis holds true, then the next ...
RELATED TERMS
  1. Cook The Books

    A buzzword describing fraudulent activities performed by corporations ...
  2. Statement Of Retained Earnings

    A financial statement outlining the changes in retained earnings ...
  3. Off-Balance-Sheet Financing

    A form of financing in which large capital expenditures are kept ...
  4. Accounting Event

    A transaction or change recognized on the financial statements ...
  5. Accounting Entity

    A clearly defined economics unit that is accounted for separately. ...
  6. Manipulation

    The act of artificially inflating or deflating the price of a ...
RELATED FAQS
  1. What kind of financial reporting requirements does GAAP set out?

    Look at some of the major financial reporting requirements set forth by the generally accepted accounting principles and ... Read Answer >>
  2. What are the most common continuation patterns?

    Learn more about three of the most common types of continuation patterns – triangles, pennants and flags -- and how to differentiate ... Read Answer >>
  3. What are some of the basic Generally Accepted Accounting Principles?

    Learn more about generally accepted accounting principles determined by the Financial Accounting Standards Board, including ... Read Answer >>
  4. What is the difference between a P&L statement and a balance sheet?

    Take a deeper look at the differences between the profit and loss statement and the balance sheet, two of the most important ... Read Answer >>
  5. Who sets the guidelines for accounting principles?

    Understand the generally accepted accounting principles and why they were put in place. Learn what entity sets the guidelines ... Read Answer >>
  6. Why should investors be wary of off balance sheet financing activities?

    Find out why investors should be wary of off-balance-sheet financing, including how businesses use this accounting technique ... Read Answer >>
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center