The accrual ratio — net income minus CFO over average total assets — flags profit that exists only on paper, and sustained high accruals predict poor forward returns across large samples. The Beneish M-score is an eight-variable manipulation screen. Both are smoke detectors, never verdicts.
The lesson's interactive checklist covers twenty flags: revenue growing while operating cash flow stalls, DSO drifting for consecutive years, inventory outgrowing revenue, repeated "one-off" charges, a widening GAAP to non-GAAP gap, capitalisation switches, auditor changes, restatements, clustered CFO departures, goodwill carried without impairment, undisclosed organic growth, related-party transactions, heavy stock comp, an unexplained low tax rate, supply-chain finance funding the cash flow, dropped disclosures, insider selling ahead of guidance, a concentrated maturity wall, and going-concern language.
Two or three flags is normal life; a cluster in one area is a thesis. They almost never appear in the press release — they live in the footnotes, the segment tables, the critical audit matters, the related-party note, and the gap between what management said last year and what happened.
Educational, not investment advice.