Accounting Red Flags Checklist: 4 Checks for India

My grandmother never trusted a recipe she couldn't smell first. Before she tasted a curry, she'd lean over the pot and breathe in. If something was off — too much oil, a spice gone stale, milk on the turn — her nose caught it before her tongue did. She wasn't a chemist. She just knew the smell comes before the taste, and the smell is where the warning lives.

A company's accounts are the same. You don't need to be a forensic auditor to catch the first whiff of something wrong. You need a nose — a short list of things to sniff for before you commit a single rupee. Most accounting blow-ups in India weren't invisible; the smell was in the numbers, quarters before the taste turned bad. This is your smell test: four checks, each one a question you can actually answer, before you taste.

Why the smell test matters more than the headline

The headline number every app shows you — net profit — is the most cooked dish in the kitchen. It's the bottom of the income statement, so every choice management made on the way down has already been stirred in. Warren Buffett, in his 2000 letter to shareholders, described CEOs who, "after exhausting all that operating acrobatics would do, they sometimes played a wide variety of accounting games to 'make the numbers'" (Berkshire Hathaway, 2000).

So treat the profit figure as the finished plate. Before you eat it, lean over the pot. Here's what to smell for.

Check 1: Does profit turn into cash — or just into receivables?

The first and most important smell: profit rising while cash does not. A real profit eventually shows up as money in the bank. A paper profit shows up as a growing pile of receivables — bills the company has booked as sales but hasn't actually collected.

Here's the trap. A company can record a sale the moment it ships a product, even if the customer hasn't paid. Book enough of those, and profit climbs while the bank balance stagnates. The gap parks itself in receivables and inventory — together, working capital. When working capital balloons faster than sales, profit is being manufactured on paper.

You can smell this without a cash-flow statement. Watch working capital days — roughly, how long the company's money is tied up before it returns as cash. Rising days, year after year, while profit grows, is the smell of profit that isn't turning into money.

Suzlon Energy, the wind-turbine maker, is a live example. On its FY26 earnings calls, management guided it would "bring it down close to about 75 days" — its own working-capital-days target. Inve's Promise Tracker currently flags that commitment as at risk (Inve data, 2026): the number is moving the wrong way against what management said. That's not an accusation of fraud — Suzlon's profit is largely real today. It's exactly the signal an owner watches: management itself admitting the cash cycle is straining against the guidance. (Why cash beats profit, in full, is its own lesson — see cash is truth.)

What to query: pull four years of sales and net profit, then check whether receivables and inventory (working capital) grow faster than sales. If profit is up 40% but the money tied up in the business is up 80%, the curry smells of oil.

Check 2: Is the profit coming from the business — or from "other income"?

The second smell: operating profit flat, but net profit jumping on "other income."

Every income statement has a line called other income — money earned outside the core business: interest on cash, gains on selling assets, one-time write-backs. A little is normal. A lot, especially in a year the actual business didn't grow, is a flag. It means the headline profit isn't coming from selling the product — and "somewhere else" usually doesn't repeat.

Suzlon shows this beautifully, because it happened to them. In FY23, Suzlon reported a net profit of ₹2,887 crore (Inve data, 2026). Impressive — until you smell it. Its operating profit that year was only ₹832 crore. The difference came almost entirely from ₹2,740 crore of other income — roughly 95% of the headline profit — driven by a one-time gain as the company restructured its crushing debt. Not fraud; fully disclosed. But a one-off.

The very next year told the truth. In FY24, with the one-off gone (other income actually turned negative), net profit collapsed to ₹660 crore — even though operating profit rose to ₹1,029 crore (Inve data, 2026). The real business got better; the headline profit fell by three-quarters. Anyone anchoring on the FY23 headline read the business exactly backwards.

By FY25 the picture was clean again: ₹2,072 crore net profit sitting on ₹1,857 crore of operating profit, other income a modest ₹104 crore (Inve data, 2026). That's what a profit driven by the business looks like.

What to query: compare operating profit and other income for each of the last four years. If net profit jumps in a year when operating profit didn't, and other income did the heavy lifting, ask what that other income was — and whether it can possibly repeat.

Check 3: Are real costs being hidden on the balance sheet?

The third smell is subtler: costs that should hit the profit line getting parked on the balance sheet instead. Accountants call it capitalising. When a company spends on something that lasts years — a factory — it's fair to spread that cost over time rather than dump it into one quarter. That spending sits in capital work-in-progress (CWIP) until the asset is ready.

The trick is when running costs — interest, salaries, routine expenses that should reduce this year's profit — get quietly reclassified as "asset under construction." Profit looks higher because a real expense is hidden in CWIP. The smell: CWIP or "intangible assets under development" swelling year after year, never converting into a finished, productive asset.

This one needs care, because growth companies legitimately have rising CWIP — they're genuinely building. Suzlon's CWIP grew from about ₹6 crore (March 2023) to ₹286 crore (September 2025) as it expanded capacity (Inve data, 2026) — but that's tiny against a balance sheet of roughly ₹15,800 crore, and it's matched by real, growing operating profit. So here it reads as building, not hiding. The flag is the opposite case: CWIP ballooning to a large share of assets while operating cash and profit go nowhere. That gap is the tell.

What to query: track CWIP and intangibles-under-development as a share of total assets over four to five years. If they keep growing but never "complete" into operating assets that produce profit, ask why the construction never finishes.

Check 4: Who's leaving the kitchen — the auditor or the CFO?

The last smell isn't in a number at all. It's in the people. A statutory auditor or chief financial officer who leaves abruptly is the cook walking out of the kitchen mid-meal. They've seen the pot up close. When they leave suddenly — with a vague reason, or right before results — pay attention.

India's regulator made this checkable. Under SEBI rules (Circular CIR/CFD/CMD1/114/2019, 18 October 2019), a listed company must disclose the detailed reasons for a statutory auditor's resignation to the stock exchanges "as soon as possible but not later than twenty-four hours" (SEBI circular summary). The rule exists because too many auditors were quitting abruptly, citing "pre-occupation," right before signing off on accounts. The regulator decided investors deserved to know why.

So the disclosure is there, on the exchange filings. The flag is a pattern: auditors changing every couple of years, a CFO exiting just before results season, "personal reasons" where a real reason should be. One change is life. A revolving door is a smell. (How to read what the auditor actually signed — clean, qualified or worse — is its own lesson: see the auditor's report.)

What to query: check the company's exchange announcements (NSE/BSE) for auditor and CFO changes over five years, and read the stated reason. Frequent exits, or thin explanations, are the cook's empty apron on the floor.

The smell test isn't a verdict — it's a reason to look closer

One honest caveat, because a checklist can be misused. A single red flag is not proof of fraud, and Suzlon is named here purely to teach the checks — not as a buy or sell call. Other income can be legitimate. CWIP can be real building. An auditor can genuinely retire. My grandmother's nose didn't condemn the curry; it told her to taste carefully before serving it.

That's the right use. A flag doesn't end the analysis — it starts it. It tells you which pot to lean over, which note in the annual report to read, which question to ask on the next concall. The investors who get hurt aren't the ones who smelled something and looked closer. They're the ones who never leaned over the pot at all — who saw a fat net-profit headline and tasted without smelling.

You now own the nose. Four smells: profit that doesn't become cash, profit that comes from "other income," costs hidden on the balance sheet, and the cook walking out. Run them before you buy, and you'll catch most of what a beautiful headline is hiding. What you do after you smell something — that's where the real work, and the margin of safety, begins.

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