Red Flags in SEC Filings Checklist
The most comprehensive checklist of warning signs that often appear before major stock declines. Based on analysis of hundreds of corporate failures.
Universal Truth
Companies are legally required to disclose material risks in SEC filings. They often bury bad news in dense legal language, but they must tell you. The trick is knowing where to look and what phrases really mean.
Red Flags by Category
Accounting & Financial Reporting
Critical SeverityMultiple restatements
Pattern of fixing prior numbers suggests systemic issues
Auditor changes mid-year
Often signals disagreements over accounting treatment
Auditor resignation letter
Read the 8-K exhibit - auditors rarely quit good clients
Material weakness in controls
Company cant trust its own numbers
Going concern warning
Auditor doubts survival beyond 12 months
Delayed filing (NT 10-K/Q)
Accounting problems or worse hiding beneath
CFO turnover pattern
Multiple CFOs in 2 years = major red flag
Revenue & Customer Quality
High SeverityCustomer concentration > 25%
Single customer loss could devastate business
Rising DSO (days sales outstanding)
Taking longer to collect = customers struggling
Channel stuffing language
Extended payment terms or right of return = pulling future sales
Bill and hold transactions
Revenue without delivery = aggressive accounting
Barter transactions
Non-cash revenue often overvalued
Related party revenues
Selling to yourself isnt real growth
Percentage of completion changes
Easy to manipulate long-term contract revenue
Cash Flow & Liquidity
Critical SeverityOperating cash flow < net income
Profits without cash = accounting games likely
Factoring receivables
Selling future cash at discount = desperation
Covenant violations or waivers
Breaking loan terms = financial stress
Maxed credit facilities
No borrowing capacity left for emergencies
Negative working capital
Cant pay bills due within a year
Asset sales to meet obligations
Selling furniture to pay rent never ends well
Pension underfunding > 20%
Hidden debt that will come due
Management & Governance
High SeverityCEO/CFO simultaneous departure
Top leaders dont leave together unless forced
Excessive executive turnover
Smart people flee sinking ships first
Board resignations with disagreements
Directors citing disagreements = major issues
No earnings calls or guidance
Management hiding from analysts questions
Related party transactions growing
Self-dealing rarely benefits shareholders
Clawback of executive comp
Taking back pay = they did something wrong
SEC investigation disclosed
Where theres smoke, theres usually fire
Business Deterioration
Moderate SeverityDeclining gross margins
Pricing power evaporating or costs out of control
Inventory write-downs recurring
Products becoming obsolete or unsaleable
Goodwill impairments
Admitting acquisitions were overpriced
Store closures accelerating
Shrinking to survive rarely works
Market share losses noted
Companies rarely admit this unless severe
Restructuring charges every year
Perpetual restructuring = broken business model
Discontinued operations growing
Cutting off limbs to save the body
Legal & Regulatory
Variable SeverityDOJ or criminal investigation
Criminal probes destroy companies
Whistleblower lawsuits
Insiders know where bodies are buried
Patent invalidation risks
Core products could lose protection
Regulatory approval delays
Critical for pharma/biotech survival
Class action lawsuits filed
Check if lead plaintiff is pension fund (serious)
Foreign corrupt practices act
FCPA violations = massive fines coming
Environmental liabilities growing
Cleanup costs often underestimated
Deadly Phrases to Watch For
These phrases appear repeatedly before corporate disasters. When you see them, read very carefully:
| If They Say... | They Mean... |
|---|---|
| May not be able to continue as a going concern | Were almost bankrupt |
| Substantial doubt about ability to continue | Auditor thinks were done |
| Exploring strategic alternatives | Looking for a buyer or bankruptcy |
| Covenant modifications obtained | Begged lenders not to call loans |
| Rationalize our footprint | Mass closures coming |
| Right-sizing the organization | Major layoffs ahead |
| Challenging macro environment | Our business is failing but blaming economy |
| Delayed due to complexity | Accounting is a mess |
| Disagrees with managements assessment | Auditor calling BS |
| Emphasis of matter paragraph | Auditor really wants you to notice this |
Risk Scoring Guide
0-2 flags
Low Risk
Action: Normal monitoring
3-5 flags
Moderate Risk
Action: Increased scrutiny, reduce position
6-9 flags
High Risk
Action: Consider exiting position
10+ flags
Critical Risk
Action: Exit immediately
Where to Find Red Flags
In 10-K/10-Q Filings:
- →Item 1A: Risk Factors (new risks added)
- →Item 3: Legal Proceedings (lawsuits)
- →Item 7: MD&A (management discussion)
- →Item 9A: Controls and Procedures
- →Footnotes: Where details hide
In 8-K Filings:
- →Item 1.03: Bankruptcy proceedings
- →Item 2.04: Triggering events
- →Item 4.02: Restatements
- →Item 5.02: Executive departures
- →Item 8.01: Other events (catch-all)
Case Studies: Red Flags That Predicted Disasters
Enron (2001)
Red flags visible 18 months before collapse:
- Complex off-balance-sheet entities in footnotes
- CFO acting as general partner in related entities
- Mark-to-market accounting for long-term contracts
- Insider selling accelerating while buying ceased
Wirecard (2020)
Red flags ignored for years:
- Auditor refused to sign off without third-party confirmations
- Acquisition accounting irregularities
- Round-trip transactions with partners
- CEO attacking short sellers instead of addressing concerns
FTX (2022)
Red flags in related party dealings:
- Billions in loans to executives
- No board of directors
- Commingling of customer and corporate funds
- Audited by small unknown firm
Your Action Plan
- 1.Check quarterly: Run through this checklist for every position you own
- 2.Set alerts: Use EDGAR email alerts for any 8-K filings
- 3.Compare over time: Red flags usually multiply before disaster
- 4.Trust your gut: If it seems too complex, it probably is
- 5.Act on evidence: Dont rationalize red flags away