# Forensic Redflags India > Run a forensic red-flag scan on an Indian listed company using accounting ratios, disclosure patterns and governance signals calibrated to Indian reporting. Use when assessing accounting quality, earnings manipulation risk, promoter integrity, or whether a cheap-looking Indian stock is a value trap; when the user says "is this company cooking the books", "red flags", "governance risk", "forensic", or names a company after an auditor resignation, pledge spike or receivables blow-up. - Skill: `sharma23yash-oss/forensic-redflags-india` (Agent Skill) - Install (CLI): `npx skillmds@latest add sharma23yash-oss/forensic-redflags-india` - Raw SKILL.md: https://api.skillmd.com/api/skills/sharma23yash-oss/forensic-redflags-india/raw - Safety review: pending - Works with: Claude Code, Claude.ai, OpenAI Codex - Category: Finance & Business - License: MIT - Author: sharma23yash-oss (https://skillmd.com/u/sharma23yash-oss) - Updated: 2026-09-17 - Page: https://skillmd.com/skills/sharma23yash-oss/forensic-redflags-india --- # Forensic Red Flags (India) Indian accounting fraud has a recognisable grammar: cash that exists on paper, receivables that never age out, a subsidiary web, a related-party supplier, a pledged promoter, and an auditor who leaves. This skill scores those patterns. The output is a **risk register with evidence**, never a verdict. Say "these five disclosures are inconsistent with management's story", not "this is a fraud." ## Part 1 — Quantitative screens Run all of these. Each needs 5 years of consolidated data. ### 1. Cash conversion ``` Cumulative CFO / Cumulative PAT (5y) < 0.6 → flag CFO / EBITDA (each year) < 0.5 → flag ``` Profits that never become cash are the base case for every accounting fraud. ### 2. Working capital drift ``` Debtor days = Trade receivables / Revenue × 365 Inventory days = Inventory / COGS × 365 Creditor days = Trade payables / COGS × 365 Cash conversion cycle = Debtor + Inventory − Creditor days ``` Flag when debtor days rise >20% over three years while revenue growth is flat or slowing. Then check the ageing schedule: receivables over 180 days rising as a share of the total, with provision not keeping pace, is the signature of revenue recognised on paper. ### 3. The Beneish M-Score (8 variable) ``` M = −4.84 + 0.920·DSRI + 0.528·GMI + 0.404·AQI + 0.892·SGI + 0.115·DEPI − 0.172·SGAI + 4.679·TATA − 0.327·LVGI ``` Where TATA = (Income from continuing operations − CFO) / Total assets. **M > −1.78 → elevated manipulation probability.** Treat as a screen, not a conclusion. TATA and DSRI drive most of the signal; if the score trips, read those two components rather than the composite. Calibration note for India: SGI runs high for genuinely fast-growing companies, so M-Score produces more false positives in Indian small and mid caps than in developed markets. Always pair with the qualitative section below. ### 4. Altman Z-Score (emerging-market variant) ``` Z(EM) = 3.25 + 6.56·X1 + 3.26·X2 + 6.72·X3 + 1.05·X4 X1 = Working capital / Total assets X2 = Retained earnings / Total assets X3 = EBIT / Total assets X4 = Book value of equity / Total liabilities ``` Z < 5.5 → distress zone for an emerging-market non-manufacturer. Do **not** apply the classic manufacturing Z-Score to Indian banks, NBFCs or asset-light services companies — use `bank-nbfc-analysis` for lenders. ### 5. Piotroski F-Score (0–9) Nine binary tests across profitability, leverage/liquidity and operating efficiency. F ≤ 3 on a statistically cheap stock is the classic value trap profile. F ≥ 7 with rising ROE is the opposite. ### 6. Accrual ratio ``` Accruals = (Net income − CFO) / Average total assets ``` Persistently above 10% is a flag. Rank against sector peers, not an absolute threshold. ### 7. Cash on books vs interest earned ``` Implied yield on cash = Other income (interest component) / Average cash & equivalents ``` If a company reports ₹2,000 cr of cash and earns an implied 1.5% on it while G-Secs yield ~6.8%, the cash is either restricted, encumbered, or not there. **This single test has caught more Indian accounting frauds than any ratio.** Corollary: a company that holds large cash *and* carries expensive debt at the same time owes you an explanation. ### 8. Capital work-in-progress that never commissions Track CWIP as a % of gross block over 5 years. CWIP that grows every year and never transfers to PPE is a classic parking place for diverted capex. ### 9. Tax rate reconciliation Effective tax rate materially below the statutory rate (25.17% under the 22% concessional regime; ~34.94% under the default regime, both including surcharge and cess) with no disclosed reason — SEZ benefit, brought-forward losses, tax holiday — means reported profit and taxable profit disagree. Read the tax reconciliation note. ### 10. Auditor fee ratio ``` Non-audit fees / Total auditor fees ``` Above ~30% raises independence questions. Disclosed in the notes. ## Part 2 — Disclosure and governance signals These carry more weight than the ratios. Score each present/absent. **Severity 1 — investigate immediately** - Auditor resignation mid-term, or a Big-4/large-firm auditor replaced by a small unknown firm - Qualified, adverse or disclaimer opinion - CARO 3(ii) mismatch between quarterly stock statements filed with banks and audited books - CARO 3(ix) default in repayment, or wilful defaulter tag - CARO 3(xi) fraud reported by the auditor - SEBI or NFRA order, adjudication, or show-cause notice against the company, promoters or directors - Promoter pledge above 50% of promoter holding, or a sharp increase in pledge - Independent director resigning with a substantive reason in the resignation letter (SEBI requires the full letter be disclosed) - Delay in filing results, or repeated requests for extension - Restatement of prior-period figures **Severity 2 — weight heavily** - CFO or Company Secretary churn (two or more in three years) - Promoter stake sold quietly through the market while management guides for growth - Frequent changes in accounting policy, estimate, or depreciation method - A subsidiary web disproportionate to the size of the business, especially overseas - Related-party royalty or brand fee rising faster than revenue - Preferential allotment or warrants to promoters at a depressed price - Repeated equity dilution without a matching increase in return on capital - Pledged shares invoked by a lender - Change of registered office or name that obscures a prior history **Severity 3 — note and monitor** - Very high receivable concentration in a single customer - Loans and advances to entities with no disclosed commercial relationship - Aggressive capitalisation of interest or development costs - Segment reporting that is merged or restated to hide a declining line - Contingent liabilities > 50% of net worth - Consistently low dividend/buyback despite large reported cash ## Part 3 — Where to verify | Signal | Primary source | |---|---| | Filings, results, announcements | NSE and BSE corporate announcements | | Shareholding, pledge | Quarterly shareholding pattern on NSE/BSE | | Enforcement, orders, settlements | SEBI orders and adjudication pages | | Audit quality actions | NFRA orders | | Subsidiary financials, charges | MCA21 — company master data, index of charges, AOC-4 | | Insolvency proceedings | IBBI public announcements | | Defaults, credit view | Rating agency rationales (CRISIL, ICRA, CARE, India Ratings) — a rating downgrade rationale often says out loud what the AR does not | | Litigation | Company's own contingent liability note; e-courts for larger matters | **Rating rationales are the most under-used forensic source in India.** Agencies see monthly no-default statements, bank facility utilisation, and management interactions that public investors do not. ## Part 4 — Scoring and output Assign a composite: - **Severity 1 present** → Red. Thesis is unsafe regardless of valuation. - **≥3 Severity 2, or 1 Severity 2 + weak cash conversion** → Amber. Requires a satisfactory management answer before sizing. - **Only Severity 3** → Watch. Note in the file, re-check each quarter. ```markdown # — Forensic Screen **Composite: RED / AMBER / WATCH** ## Quantitative | Test | Value | Threshold | Flag | |---|---|---|---| ## Disclosure signals | Signal | Severity | Evidence (source + date) | |---|---|---| ## What would change this view 1. ... ## Questions requiring a management answer 1. ... ``` ## Hard rules - **Every flag cites a document.** Filing name, date, page or note number. No flag without a source. - **Never state or imply that fraud has occurred.** Describe the inconsistency and let it stand. Distinguish "the disclosures are inconsistent" from "management is dishonest" — you can evidence the first, never the second. - **Do not repeat allegations from social media, anonymous short-seller posts, or forums as fact.** They can be a reason to look; they are not evidence. - **A high score is a reason to research, not to short.** Say so. - This skill produces research inputs. It is not investment advice, and the user should be told so in the output.