Recent academic studies find that there are more

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accounting or the auditor's unwillingness to report a "clean bill of health". Recent academic studies find that there are more auditor resignations when litigation risk increases and a company's financial health is deteriorating, so watch out for them. (To learn more, check out Spotting Creative Accounting On The Balance Sheet .) Business and Management Warning Signs While information found on financial statements can help with gauging a company's health, it is important not to ignore managerial and operational signs of distress. Many private companies do not disclose financial statements to the public, so business information may be all that's available for gauging their well being. Look out for changes in the market environment. Often, they can trigger – if not cause – deterioration in a company's financial health. A downturn in the economy, the appearance of a strong competitor, an unexpected shift in buyer's habits, among other things, can put serious pressure on a company's revenues and profitability. Unless these problems are effectively managed, in the worst case, they can be the start of a downward slide in the company's fortunes. Be aware of the company's customers, competitors, market and suppliers, and and try to stay in front of any changing market trends. Be wary of dramatic changes in strategy. When a company drifts away from its traditional game plan, the company might be in financial trouble. Let's say a company has positioned itself as the global leader in cheap, fast temporary workers for fifty years, and then launches a strategy that forces all salespeople to stop talking about temp workers, and start selling high gross margin permanent placements. There could be a big problem.
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Or when a company all of a sudden starts slashing prices, you have to ask yourself: "Why?" It may mean that the company is in a big rush to increase sales volume and get more cash into the business– regardless of potentially detrimental impact of such a move long term impact on profits or its brand. A desperate grab for cash – also witnessed when companies suddenly start selling off core business assets – could be a sign that suppliers or lenders are banging at the door. Another sign of distress: product and service quality deterioration. Naturally, a company that is fending off bankruptcy will have an incentive to cut costs, and one of the first things to go is quality. Look for the sudden appearance of shoddy workmanship, slower delivery times and failure to return calls. Lest we forget, the sudden departure of key executives or board directors can also signal bad news. While these resignations may be completely innocent, they demand closer inspection. Warning bells should ring the loudest when the individual concerned has a reputation as a successful manager or a strong, independent director.
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