Financial statement reviews provide informed insights into a company’s financial health.
It is a structured check-up of a company’s financial reports—income statement, balance sheet, and cash flow statement—to ensure they’re accurate, compliant, and decision-ready.
It’s less in-depth than a full audit, but more than just glancing at numbers—it’s about:
- Verifying accuracy – spotting misclassifications, missing entries, or math errors
- Checking compliance – making sure the statements align with GAAP, IFRS, or other standards
- Analyzing performance trends – comparing actuals to budget, prior periods, or industry benchmarks
- Identifying risks – finding warning signs in liquidity, debt, margins, or revenue quality
- Preparing for stakeholders – ensuring clean, defensible numbers for lenders, investors, or buyers
Think of it as “preventive maintenance” for your company’s financial health—catching issues in Q3 can prevent costly year-end surprises.
Do you know that 86% of CFOs say financial decisions are made without sufficient data or insight, citing reporting accuracy (32%) and outdated tech (34%) as major concerns? This underscores why a Q3 financial statement review isn’t just recommended—it’s essential. It helps CFOs transition from a reactive to a proactive approach, identifying issues and problems before they escalate into costly emergencies, ensuring decisions are data-driven, confident, and strategically aligned.
So, what are the red flags or anomalies CFOs need to look out for in reviewed financial statements to ensure a smooth and compliant year-end close?
Top 5 Areas to Spot Accounting Red Flags in Reviewed Financial Statements
1) Margin compression
Margin compression occurs when the difference between costs and revenue shrinks. This means that the costs are increasing at a faster rate than the revenue generated from the same.
Common reasons include:
- Pricing pressure from increased competition, due to which companies lower prices, trimming margins
- Rising input costs that cannot be passed on to customers
- Inefficient operations contribute to higher costs and lower margins
- Macroeconomic factors like inflationary pressure and economic downturns
Red flags:
- Gross margin compression without a cost driver explanation
- Expense categories exceeding budget by >10%
- One-off costs that should be capitalized or deferred
2) Revenue fluctuation
Revenue spikes or fluctuation refers to sharp variations in income or revenue over a specific period, usually influenced by a variety of internal and external factors. Analysing revenue spikes in reviewed financial statements is crucial for understanding financial performance, improving forecasting and budgeting, managing risk, driving informed decision-making, and gaining investor confidence.
Common reasons for revenue fluctuation include:
- Changes in market demand can lead to fluctuations
- Competition can lead to pricing pressure or an increase in sales that comes with effective strategies
- Policy shift or strategic moves like new product launches, pivots in business model, pricing adjustments, or supply chain issues
Red flags:
- Unusual spikes/drops in sales without a clear business driver
- High dependency on a single customer (>20% revenue)
- Deferred revenue not matching service delivery timelines
3) Cash Flow and Liquidity
Cash flow and liquidity are important indicators of a company’s financial health.
While they are closely related, they are both distinct concepts. Cash flow presents a holistic picture of the movement of money in the business, and liquidity is the ease with which assets can be monetized – essentially an indicator of the readiness to cover short-term liabilities or obligations.
Strong, consistent cash flow is a key driver of liquidity, assuring that the business generates sufficient cash from core activities to meet its financial obligations and remain sustainable. A profitable business need not necessarily have optimal liquidity, especially if it is struggling with unpaid invoices or over-commits with long-term investments without securing short-term cash flow.
Analyzing both cash flow and liquidity in the reviewed financial statements is essential for a comprehensive financial review because:
- Cash flow statements help identify:
- The sources and uses of cash
- Trends in cash generation and spending
- Potential cash shortages or surpluses
- Sustainability of the company’s operations
- Liquidity challenges
Red flags:
- Operating cash flow is trending negative despite positive net income
- DSO (Days Sales Outstanding) increasing vs. prior quarters
- Unexplained short-term borrowing to cover operating needs
4) Balance Sheet Strength
The balance sheet is a crucial indicator of a business’s financial health and a vital component of financial statement review. It provides accurate insights into the composition of assets, liabilities, and equity, helping investors, creditors, management, and other stakeholders understand the business’s resilience, its ability to meet financial obligations, withstand market volatility, and capitalize on opportunities.
Analyzing the balance sheet, along with the cash flow and income statements, presents a holistic picture of a company’s financial health.
Components of a strong balance sheet:
- Optimized working capital to fund operations and growth
- Positive cash flow
- Balanced capital structure – optimal mix of debt and equity financing
- Income-generating assets
- Strong financial ratios
Red flags:
- Inventory build-up outpacing sales
- AR aging >90 days growing as a % of total receivables
- Under-reserved bad debts or obsolete inventory
- Off-balance sheet liabilities, large deferred tax liabilities, and frequent reclassification of debt can make the company appear less indebted than it truly is, as debt is shifted between short-term and long-term classifications.
- Large treasury stock, negative shareholders’ equity
5) Compliance and Governance
Just like cash flow and liquidity, compliance and governance are distinct yet interconnected aspects of a business, crucial to running fair and ethical operations, achieving goals, and successfully navigating the regulatory landscape.
Governance refers to the established framework of rules, practices, and processes that govern an organization’s operations.
Governance covers:
- Decision-making and accountability matrix
- Adherence to strategic objectives
- Monitoring of efficiency and effectiveness
- Promotion and balancing of all stakeholder interests (employees, customers, suppliers, etc.)
Compliance is the process of adhering to all rules, laws, and regulations applicable to the business and the industry in which it operates. This includes both external and internal policies, as well as compliance with standards or protocols, whether voluntarily or by mandate. Failure to comply can result in government fines or penalties, loss of goodwill, and poor business performance.
Red flags:
- Missed statutory tax or filing deadlines
- Gaps in IFRS/GAAP adjustments for new standards
- Internal control weaknesses flagged in prior reviews are still unresolved
Important Considerations
Identifying the accounting red flags in the reviewed financial statements is the first step. Further investigation and deeper analysis are required to understand if they indicate genuine concerns or have valid and reasonable explanations.
What you need to consider:
- Potential influence of seasonal factors
- Conduct a comparative analysis with previous quarters and industry benchmarks to identify trends
- Evaluate management opinions and explanations
The Takeaway
A Q3 financial statement review isn’t just a compliance exercise—it’s your early-warning system and strategic compass. Spotting red flags now gives you the runway to correct course before year-end, strengthen stakeholder confidence, and position your business for a stronger Q4 close. In today’s market, agility isn’t optional; it’s your competitive edge. Treat your review as both a diagnostic and a roadmap—because the businesses that finish the year strongest are the ones that adapt fastest.
