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. Markets

    Financial Statement Manipulation An Ever-Present Problem For Investors

    The SEC has taken steps to eliminate this type of corporate fraud, but it remains a real risk for investors.
  2. Investing

    Cooking The Books

    To spot the signs of earnings manipulation, you need to know the different ways companies can inflate their figures.
  3. 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.
  4. Investing

    Look For These Red Flags In The Income Statement

    Companies can overstate their revenues and understate their losses to boost investor confidence. Learn how to spot the these red flags in income statements.
  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. Personal Finance

    Top 8 Ways Companies Cook The Books

    Find out more about the fraudulent accounting methods some companies use to fool investors.
  7. Professionals

    Chapter Five

    In this chapter we look at bonds and interest rates.
  8. Professionals

    Chapter Two

    Financial statements, taxes and cash flow.
  9. 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.
  10. Professionals

    Chapter 11 - 15

    Auto Chapter
RELATED TERMS
  1. Financial Statements

    Records that outline the financial activities of a business, ...
  2. Cook The Books

    A buzzword describing fraudulent activities performed by corporations ...
  3. Off-Balance-Sheet Financing

    A form of financing in which large capital expenditures are kept ...
  4. Generally Accepted Accounting Principles ...

    The common set of accounting principles, standards and procedures ...
  5. Wage Earner Plan (Chapter 13 Bankruptcy)

    Also known as a Chapter 13 bankruptcy, this enables individuals ...
  6. Manipulation

    The act of artificially inflating or deflating the price of a ...
RELATED FAQS
  1. What are the differences between Chapter 11 and Chapter 13 bankruptcy?

    Discover the differences, including respective advantages and disadvantages, between Chapter 11 bankruptcy and Chapter 13 ... Read Answer >>
  2. 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 >>
  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. 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 >>
  5. 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 >>
  6. How does off balance sheet financing work?

    Read about the use of off-balance-sheet financing in corporate America, including the use of special purpose vehicles to ... Read Answer >>
Hot Definitions
  1. Goodwill

    An account that can be found in the assets portion of a company's balance sheet. Goodwill can often arise when one company ...
  2. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  3. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  4. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  5. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
Trading Center