8 Red Flags in a 10-K (and the Real Filings That Show Each One)

The eight red flags in a 10-K that should make you stop and dig: a going-concern warning, an auditor who quits, a restatement, a material weakness in internal controls, operating cash flow below net income, receivables growing much faster than sales, inventory growing much faster than sales, and "one-time" charges that come back every year. The first four are the serious ones, and they cluster in smaller companies. In the past year, about 1,250 companies warned in their own 10-K that there was "substantial doubt" they could stay in business. None was in the S&P 500. The last four are common even at the biggest companies, and matter most in combination.

Watch it play outNearly 1 in 5 annual reports carried a going-concern warning

Each dot is 1 in 100 of the 6,567 companies that filed a 10-K in the past year.

19 in 100, about 1,250 companies, warned of substantial doubt that they could stay in business.

12 in 100, about 800, said their internal control over financial reporting was not effective.

7 in 100 changed auditors. Most switches are routine. A few are alarms.

About 1 in 70 told investors to stop relying on numbers they had already published.

In the S&P 500: no going-concern warnings at all. Big companies trip the quieter flags instead.

Replay

A 10-K is the annual report every US-listed company files with the SEC. For each warning sign below, you get where it sits, the search term or ratio that finds it in minutes, and a real filing that shows it. Where the record shows what happened next, we include that too. The counts come from our scan of every 10-K and 8-K filed in the past year and of S&P 500 financial data (method below). For a walkthrough of the whole document, see how to read a 10-K.

S&P 500 counts for flags 5 to 7 leave out banks, insurers and other financial firms, where these ratios don't apply, and flag 5 counts only companies with a profit. All four S&P 500 counts include only companies that report the numbers in the SEC's standard data format.

1. A going-concern warning ("substantial doubt")

A going-concern warning means the company, its auditor, or both doubt it can pay its bills for the next 12 months. It's the most serious sentence a 10-K can contain. Management checks for it at every reporting date. Willis Towers Watson's 10-K, for example, says it runs the test "at each annual and interim period." When doubt remains, the auditor adds a paragraph to its report saying so.

Where it sits: the auditor's report at the start of Item 8. Look for a heading like "Substantial Doubt About the Company's Ability to Continue as a Going Concern." It's repeated in the first notes to the financial statements and usually near the top of the risk factors.

How to check: Ctrl+F (Cmd+F on a Mac) for "substantial doubt," then read the whole sentence. Healthy companies use the same words to say the opposite. Willis Towers Watson's version reads: management "has concluded that there are no conditions or events... that raise substantial doubt." When we read a random sample of 40 hits, 5 were all-clears like that or warnings that had since eased.

Real example: iRobot. The Roomba maker's 10-K said: "Our history of operating losses and negative cash flows from operations has raised substantial doubt about our ability to continue as a going concern." The warning would have put iRobot in breach of its loan agreement if its lenders hadn't amended the agreement first.

iRobot's shareholders were wiped out ten months after the warning

1. Month 010-K warns of substantial doubtAuditor adds a going-concern paragraph
2. Month 9Chapter 11 filingPlan hands 100% of the company to its lender
3. Month 10Shares cancelledStockholders receive no recovery

Nine months later, iRobot filed for Chapter 11. Under the plan, its lender and manufacturing partner, Picea, got 100% of the company. Holders of the existing stock "will receive no recovery." About six weeks after the filing, the plan took effect and every share was "cancelled, discharged, and extinguished."

Not every warning ends that way. Of the 1,429 companies whose 10-K matched our search, 172 were blank-check companies (SPACs). They carry the warning because they must liquidate if they don't close a merger by a deadline. Another 364 were drug or medical-device developers, many still spending cash before they have products to sell. Many raise money and carry on. The past year's list also includes BuzzFeed and Spirit Airlines' parent company.

2. The auditor resigns or is fired

An auditor is the outside accounting firm that checks a company's numbers and signs an opinion on them. Companies switch auditors for dull reasons all the time. When the auditor walks away on its own, especially in the middle of an audit, it's one of the loudest alarms a company can sound.

Where it sits: an 8-K under Item 4.01. An 8-K is the form for major events between annual reports, and companies generally have four business days to file one. The old auditor's letter is attached as Exhibit 16. The next 10-K repeats the change under Item 9, "Changes in and Disagreements with Accountants."

How to check: on the company's EDGAR page, filter for 8-Ks and look for Item 4.01. Then read for three things. Who ended it: did the auditor "resign," or did the company "dismiss" it? Does the filing report any "disagreements" or "reportable events," such as a material weakness the auditor raised? And does the auditor's letter agree with the company's account?

Real example: Super Micro Computer. Ernst & Young resigned partway through its first audit of the server maker. The 8-K quotes its letter. New information, EY wrote, had led it "to no longer be able to rely on management's and the Audit Committee's representations." It was "unwilling to be associated with the financial statements prepared by management." Three months earlier, EY had raised concerns about "governance, transparency and completeness of communications." Super Micro said it disagreed with the decision.

What happened next: a special committee of the board reported that the evidence it reviewed did "not give rise to any substantial concerns about the integrity" of senior management or the audit committee. Super Micro hired BDO, and the overdue 10-K arrived almost six months after the company had filed notice that it would be late. Its latest 10-K still says internal control over financial reporting was not effective.

The same 8-K item can be routine or an alarm

Routine change

• The company dismisses the old firm after a bidding process
• A merger, spin-off or new owner
• A move between offices of the same firm
• No disagreements, no reportable events

vs

Warning sign

• The auditor resigns or won't stand for re-election
• It quits in the middle of an audit
• Its letter questions what management told it
• The company disagrees, or files its 10-K late

For contrast, six S&P 500 companies changed auditors in the past year, and all six read as routine: a bidding process, a pending takeover, or a move between offices of the same firm.

3. A restatement: "should no longer be relied upon"

A restatement means the company found errors big enough that statements it already published were wrong and must be redone. The formal notice is an 8-K under Item 4.02, which says the old numbers "should no longer be relied upon." It's a red flag even when the error is honest, because it shows the reporting process failed somewhere.

Where it sits: the 8-K first, then the next 10-K, which shows "As Previously Reported" and "As Restated" columns and a note explaining the error.

How to check: look for 8-Ks with Item 4.02, and Ctrl+F the next 10-K for "restated." Then ask one question: did the error touch revenue or cash, or only an accounting estimate?

Real example: Monolithic Power Systems. The chip designer, an S&P 500 member, told investors that its audited results for the prior year and every quarterly report since "should no longer be relied upon due to the impact of an unintentional error." The error was in deferred income taxes, the taxes a company expects to pay or recover in future years, tied to a one-time foreign tax incentive.

Revenue, operating income and cash didn't change. Net income fell $194.6 million, or $3.99 a share, and the company said the error "did not involve any misconduct." Its 10-K also reported a material weakness in its controls over deferred taxes. The table holds a second warning: even restated, a net tax benefit of $1.02 billion, driven by that one-time incentive, made up 64% of the year's profit.

In the past year, 93 companies filed an Item 4.02 notice. Monolithic Power was the only S&P 500 member.

4. A material weakness in internal control (Item 9A)

Internal control over financial reporting is the set of checks that keep the numbers right: who can approve a payment, who can change the accounting system, who reviews a contract before revenue is booked. A material weakness, in the standard wording Axon's 10-K uses, is a gap such that "there is a reasonable possibility that a material misstatement... will not be prevented or detected on a timely basis."

Where it sits: Item 9A, "Controls and Procedures," where management says whether its controls worked. At larger companies the auditor gives its own opinion on the controls in Item 8.

How to check: Ctrl+F "material weakness," then "not effective." Skip risk-factor hits that start with "if." Nearly every company writes something like "if we identify a material weakness." What counts is management's conclusion in Item 9A. Then read what the weakness covers. Weak IT access controls are a process problem. A weakness over revenue goes to the heart of the income statement.

Real example: Axon. The maker of Taser devices and police body cameras said in Item 9A that it "did not design and maintain effective controls related to revenue recognition for its customer contracts." The weakness "resulted in immaterial errors related to revenue" in earlier years, and Axon had already amended its prior 10-K.

About 800 companies reported a material weakness in a 10-K filed in the past year, roughly 1 filer in 8. In the S&P 500 there were five:

Trimble's auditor, KPMG, issued an "adverse opinion" on its controls, meaning it found they didn't work, while the company said the gaps "did not result in a material misstatement." That's typical: a material weakness is a risk of error, not proof of one.

5. Operating cash flow below net income

Net income is profit under accounting rules. Operating cash flow is the cash the business actually brought in from running itself. Over several years the two should travel together, and at most big companies cash comes out ahead, partly because depreciation is a cost that uses no cash in the year it's booked. When cash keeps falling short of profit, something is soaking it up.

Where it sits: the cash flow statement in Item 8. Its first line is net income. The line "net cash provided by operating activities" is operating cash flow. Every line in between explains the gap.

How to check: divide operating cash flow by net income for each of the last three years. If it's below 1, read the lines in between. Our guide to the numbers to check before buying a stock shows what's normal across the S&P 500.

Among 368 profitable S&P 500 companies outside finance, 33 brought in less operating cash than they booked in profit in their latest year. Only seven did it three years running. Three are homebuilders (D.R. Horton, PulteGroup and NVR), which pour cash into land and unsold homes before they sell them. Nvidia, one of the seven, shows why the ratio is a question, not a verdict.

Real example: Nvidia. Its latest 10-K reports net income of $120.1 billion and operating cash flow of $102.7 billion. The cash flow statement shows where the $17.3 billion went.

Nvidia's profit ran $17.3 billion ahead of its cash

Net income$120.1B

Stock pay and depreciation+$9.2B= $129.3B

Gains on stakes−$8.9B= $120.4B

Taxes and other−$1.7B= $118.7B

Customers owe more−$15.4B= $103.3B

More inventory−$11.3B= $91.9B

Payables and other+$10.8B= $102.7B

Operating cash flow$102.7B

Most of the gap is growth. Customers owed $15.4 billion more and inventory rose $11.3 billion as revenue jumped 65.5%. Receivables grew in line with sales, at about 65 days of sales in both years, so customers weren't paying more slowly. Another $8.9 billion was gains on stakes in other companies, profit with no cash attached. The version to worry about is profit rising while cash stalls and sales growth slows, which is what our guide to stock research mistakes found at Super Micro.

6. Receivables growing much faster than revenue

Receivables are sales a company has booked but not yet collected. When they grow much faster than revenue, customers are paying more slowly, the company is offering looser terms to win sales, or revenue is being booked early. Any of those means profit is running ahead of cash.

Where it sits: "accounts receivable, net" on the balance sheet, against revenue on the income statement. The cash flow statement shows the change on its own line.

How to check: work out days sales outstanding (DSO), the average number of days it takes to collect: receivables ÷ revenue × 365. Compare it with last year. A few days' change is noise. Ten days is a question.

Across 339 S&P 500 companies outside finance, receivables rose at least 10% and more than twice as fast as revenue at 87 in their latest year. At 51 of them, DSO rose five days or more. Only 17 did it two years running.

Real example: Nike. In its latest 10-K, receivables rose 25.7%, from $4.72 billion to $5.93 billion, while revenue stayed flat at $46.4 billion. DSO jumped from 37 days to 47.

The explanation sits in the cash flow discussion in Item 7 of the same 10-K. Nike says that after the Supreme Court ruled certain US tariffs unauthorized, it booked $684 million of refunds it was still owed at year-end, and that it collected "substantially all" of that afterward. The rest came from "higher wholesale revenues and the timing of receipts." Nike Brand sales to wholesale customers, retailers that buy on credit, rose 6%.

More than half of Nike's receivables jump was a tariff refund

Receivables a year earlier$4.72B

Tariff refunds owed+$0.68B= $5.40B

Wholesale and timing+$0.53B= $5.93B

Receivables now$5.93B

Strip out the refund and DSO rose about four days, to 41. That's what resolving a flag looks like: find the cause, size it, and see what's left. Next year's 10-K will show whether the wholesale part keeps growing.

7. Inventory growing much faster than sales

Inventory is goods made or bought but not yet sold. When it piles up faster than sales, the company either expects a jump in demand or misjudged it. The second ends in discounts, write-downs and thinner margins.

Where it sits: "inventories" on the balance sheet, against revenue on the income statement. Retailers and manufacturers also discuss inventory in Item 7.

How to check: compare inventory growth with revenue growth. For the same test in days, divide inventory by cost of sales and multiply by 365.

At 53 of 264 S&P 500 companies that report inventory, it grew at least 10% and more than twice as fast as revenue in the latest year. Eight did it two years running.

Real example: Target. About four years ago, Target's 10-K showed inventory up 30.5%, to $13.9 billion, while revenue rose 13.3%.

Target's inventory grew more than twice as fast as its sales

Inventory+30.5%

Revenue+13.3%

The next year, Target's gross margin rate fell from 28.3% to 23.6% and operating income fell 57%.

The next 10-K shows what followed. Target described "increasing promotional and clearance markdowns, removing excess inventory, and cancelling purchase orders." Its gross margin rate fell from 28.3% to 23.6%, and operating income dropped from $8.9 billion to $3.8 billion.

A current case: Cisco's latest 10-K shows inventory up 80%, to $5.7 billion, on revenue up 11.8%. Cisco says the rise reflects "increased demand for our Cisco Silicon One and the impact of higher memory prices." That's a stated bet on demand. The same filing warns that a sudden drop in demand could force it to "increase our inventory write-downs."

8. "One-time" charges that come back every year

Companies label some costs "restructuring," "special" or "non-recurring" and leave them out of the adjusted earnings they highlight. That's fair for a true one-off. When the same kind of charge appears every year, it's a normal cost of running the business, and the adjusted figure overstates what owners earn.

Where it sits: a restructuring line on the income statement or in a note, and the reconciliation from GAAP to non-GAAP results. GAAP, generally accepted accounting principles, is the official rulebook. Non-GAAP or "adjusted" figures are the company's own version. Some companies reconcile the two in Item 7; others only in the earnings release they file with an 8-K.

How to check: Ctrl+F "restructuring" and "non-GAAP," and count how many years the charge appears. Then line up GAAP net income against adjusted net income for three years. A gap that widens every year is the warning.

Across 456 S&P 500 companies, 83 booked restructuring charges in each of the last five years.

Real example: Pfizer. Its 10-K reconciles reported profit to "Adjusted income." Restructuring is one of the "certain significant items" it excludes, in all three years shown: $2.2 billion, $2.2 billion and $1.6 billion before tax. Pfizer's own description of these items says "it is reasonably possible that they could reoccur in future periods."

Pfizer's adjusted profit pulled further ahead of reported profit every year

Reported net incomeAdjusted income

51015$20B0

$2.1B$10.5B

Three years agoReported net income$2.1BAdjusted income$10.5B

$8.0B$17.7B

Two years agoReported net income$8.0BAdjusted income$17.7B

$7.8B$18.4B

Last yearReported net income$7.8BAdjusted income$18.4B

Three years agoTwo years agoLast year

Most of Pfizer's gap is write-downs and amortization, the yearly charge for intangible assets from past acquisitions. Judge those on their own merits. The restructuring line is the part that recurs like an ordinary cost, and it alone came to $6.0 billion before tax over the three years. Whatever you decide about each line, know which earnings figure you're being quoted. Last year's reported diluted earnings per share were $1.36, and the adjusted figure Pfizer highlights was $3.22. A price-to-earnings ratio built on reported profit makes the stock look more than twice as expensive as one built on the adjusted number.

Five more worth a quick search

These didn't make the eight because they're about risk or timing more than reporting quality, but each takes a minute to check:

• A late filing. A company that can't file on time files a notice called an NT 10-K first. In the past year, 586 companies did. Find it in the company's EDGAR filing list.
• One customer above 10% of revenue. Ctrl+F "10% or more" and "major customer" in the notes. Losing that customer would hit sales directly.
• Related-party deals. Ctrl+F "related party." Watch for leases, loans or sales involving executives, directors or their companies.
• A wall of debt coming due. The debt note lists maturities by year. Compare the next two years with cash on hand.
• A share count that keeps climbing. Compare diluted shares on the income statement over three years. The dilution and buyback calculator shows how much of your stake that eats.

Our read

Three of the first four flags are stop signs on their own. A going-concern warning. An auditor who resigns and questions what management told it. A restatement that changes revenue or cash. Each is reason enough to walk away, unless you can say exactly why this case is different. Read the filing before you decide, though. Monolithic Power's restatement touched taxes, not sales or cash, and all six S&P 500 auditor changes in the past year were routine.

A material weakness depends on what it covers, so it joins the last four: each matters in combination. A weakness in IT access controls with healthy cash flow is a housekeeping problem. A weakness over revenue, with receivables outrunning sales and cash falling short of profit, is a pattern.

Check cash flow against earnings first. No 8-K announces it, it takes a minute, and it's where trouble with receivables, inventory and aggressive revenue eventually surfaces. Look at three years, not one, and read the lines that explain the gap.

Three flags stop you; the rest need company

Check first

• Operating cash flow ÷ net income, three years running

Stop signs on their own

• Going-concern warning
• Auditor resigns and questions management
• Restatement that changes revenue or cash

Matter in combination

• Material weakness
• Receivables outrunning sales
• Inventory outrunning sales
• Recurring one-time charges

Go deeper with member research

The member chapter Test the quality of earnings turns this list into a method. Its "red-flag ladder" is the four steps we used on Nike earlier: observation, possible explanations, evidence, conclusion. Then it runs one company through every test here. Harbor reports $120 million of profit and $150 million "adjusted." You decide which add-backs survive, tax them properly (the $150 million shrinks to $144 million before you reject a single one), and learn to tell a timing gap in receivables from customers who will never pay. It's one of 40 chapters in the fundamental research course. The chapter on revenue recognition covers the contract terms behind a weakness like Axon's and why a receivables warning is only a starting point.

Keep reading

• How to read a 10-K: the sections to read, in order, worked through Microsoft's annual report.
• Numbers to check before buying a stock: six everyday metrics and what's normal across the S&P 500.
• Stock research mistakes: what skipping the cash flow statement cost Super Micro shareholders.
• How to research stock picks: where these checks fit in a full due-diligence process.

Questions readers ask

What are the biggest red flags in financial statements?

A going-concern warning, an auditor resignation and a restatement are the most serious, because each says the numbers or the company's survival are in doubt. Among large companies, the most useful everyday check is operating cash flow running below net income for several years.

Does a going-concern warning mean the company will go bankrupt?

No. Many companies raise money and carry on, and many blank-check SPACs carry it simply because they must liquidate if no merger closes by a deadline. But it means the company itself doubts it can last a year, so treat the stock as a bet on a rescue.

Where is the material weakness disclosure in a 10-K?

Item 9A, "Controls and Procedures." Look for management's conclusion that internal control over financial reporting "was not effective," then read the paragraph that describes the weakness.

How do I find a company's auditor changes and restatements?

They're filed as 8-Ks: Item 4.01 for an auditor change and Item 4.02 for a restatement. On the company's EDGAR page, filter to 8-K filings and check the items listed for each one.

How we built this

• Window: 10-Ks and 8-Ks filed from October 22, 2025, to October 21, 2026. EDGAR's quarterly form index lists 6,712 10-K filings by 6,567 companies in that window.
• Going-concern count: EDGAR full-text search for 10-K filings containing both "substantial doubt about" and "going concern," keeping original 10-Ks (not amendments or exhibits): 1,429 companies. We read the passages in a random sample of 40; 35 were real warnings, so we estimate about 1,250. 172 of the 1,429 were blank-check companies. The three S&P 500 hits were all false positives (a hypothetical risk factor, an all-clear and a reference to another company).
• Material weakness count: full-text search for phrases such as "internal control over financial reporting was not effective" and "did not maintain effective internal control over financial reporting": 923 companies. Samples of 40 and 30 showed about 88% were real current conclusions, giving about 800. Of nine S&P 500 hits, five were real.
• Auditor changes and restatements: 8-K filings whose EDGAR item list includes 4.01 (526 filings, 477 companies) or 4.02 (97 filings, 93 companies). We read all six S&P 500 auditor-change 8-Ks. Late-filing notices (NT 10-K) come from the same quarterly form index: 586 companies.
• S&P 500 ratios: SEC XBRL company facts for 456 current S&P 500 companies, using each company's latest 10-K and the year before. Receivables and inventory are flagged when they rose at least 10% and more than twice as fast as revenue (or rose while revenue fell). Banks, insurers and other financial firms are excluded from flags 5 to 7. Restructuring counts use four standard XBRL restructuring tags, so companies that tag these costs differently are missed and the true count is likely higher.
• Company examples and quotes come from the linked SEC filings. Data pulled October 22, 2026.