Financial Statement Red Flags

Some things are too good to be true. In the case of financial statement fraud, here are some tips.  There may be perfectly valid reasons for the items below, but they can also signal fraud.  The biggest sign of all is "sudden", as you will see below.

A wise investor will look twice before investing, and/or ask more questions if s/he already own the stock:

Sudden reversal of fortunes (higher profits, sales, etc).  Maybe it's a legitimate turnaround, but these things usually don't happen overnight.  Frauds often start with aggressive accounting practices.

Sudden increases in sales, particularly near a company's quarter or year-end. Are they legitimate, or is management trying to "make the numbers" expected from the investment analysts?

Significantly higher profits than other companies in the same industry, without a clear-cut reason why.

I'll talk about these in more detail in future posts.

Read more about Katerina Carter and Exit Strategy at http://colleencross.com/