canonical/appendices/Appendix-D-forensic-accounting-red-flag-encyclopedia.md

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<!-- Appendix: D | Title: FORENSIC ACCOUNTING RED-FLAG ENCYCLOPEDIA -->

# APPENDIX D - FORENSIC ACCOUNTING RED-FLAG ENCYCLOPEDIA

- CFO persistently trails net income without a clear structural working-capital or business-model explanation.

- Receivables, contract assets, or unbilled revenue grow materially faster than comparable revenue.

- Inventory grows faster than sell-through while management describes demand as strong.

- Large recurring one-time charges are repeatedly excluded from adjusted earnings.

- Share count rises despite substantial repurchase spending; SBC and repurchases should be analyzed together.

- Segment definitions or KPI definitions change near weak operating periods without a clean historical recast.

- Management abandons a previously emphasized KPI without reconciling the old series.

- Auditor changes, delayed filings, restatements, material weaknesses, or critical audit matters increase.

- Capitalized costs rise faster than the activity they purport to support.

- Reserve releases or favorable estimate changes support profit during operational weakness.

- Tax-rate changes drive EPS without a durable cash-tax mechanism.

- Acquisitions repeatedly reset the cost base and obscure organic growth or recurring restructuring.

- Customer concentration rises while disclosure specificity falls.

- Gross margin improves while cash conversion and working capital deteriorate without a causal explanation.

- Bookings/backlog grow because delivery slips or contract terms change rather than demand improves.

- Debt or debt-like obligations grow faster than normalized cash earnings and covenant/refinancing headroom shrinks.

- Supplier finance, factoring, securitization, or customer advances materially change CFO presentation.

- Related-party transactions become more frequent, larger, or less transparent.

- Insider sales accelerate around promotional guidance, but interpret sales in context of plans, grants, taxes, and ownership.

- Guidance ranges widen while the midpoint is emphasized, obscuring uncertainty.

- Adjusted FCF excludes recurring capex-like cash uses, restructuring cash, or acquisition integration costs.

- Warranty, returns, rebates, gross-to-net reserves, or loss reserves decline despite rising risk indicators.

- Management claims pricing power while unit volume, mix, incentives, or customer retention deteriorate.

- Fair-value inputs move favorably while observable market inputs move in the opposite direction.

- Useful lives, depreciation, capitalization thresholds, or reserve methods change and materially lift earnings.

- Debt documents contain restrictions or collateral requirements inconsistent with simplified liquidity language.

- Non-GAAP metric labels resemble GAAP while calculation or prominence could mislead.

- Cash flow improvement depends on stretching payables or drawing down inventory below sustainable operating levels.

- Organic growth calculations silently change acquisition cutoff, FX convention, or discontinued product scope.

- Large asset sales, insurance proceeds, litigation settlements, or gains recur near target-setting periods.

## Red-flag protocol

- A flag is not a conclusion. Record it as resolved, open-immaterial, open-material, or thesis-relevant.

- Seek the most benign plausible explanation and the most adverse plausible explanation, then identify evidence that distinguishes them.

- Quantify the financial and valuation impact of a reasonable normalization.

- Escalate when incentive, opportunity, accounting discretion, weak controls, and unreconciled cash/balance-sheet evidence appear together.