Due-Diligence Red Flags: Questions to Raise With the Company
Signals worth a conversation, each paired with the record you can check and the question to ask.
Red flags in due diligence are best treated as prompts for questions, not conclusions. An unusual record has many possible explanations, most of them innocent. The useful response is to identify the record, put the question to the company and see whether the answer holds up against the other records. Here are common signals, each with something to verify.
Filings and registry records
- Late or missing annual filings. Check the filing history against the due dates. Ask the company why a filing was late, and whether any penalty or notice followed.
- Frequent changes of name, address or auditor. Check the dates of each change. Ask what prompted each one.
- Directors resigning in a cluster. Check appointment and cessation dates. Ask who now makes the decisions and why the previous directors left.
Ownership and control
- The shareholder list and the control register do not agree. Compare the register of shareholders with the registered ownership or control information. Ask the company to explain any difference.
- Layers of holding companies with no stated reason. Ask for a group chart and the purpose of each entity.
- Related parties on both sides of a transaction. Ask for the list of related parties and the terms of dealings with them.
Figures and bank records
- Revenue in the deck is higher than credits to the bank accounts. Reconcile the claimed figure with bank statements for the same period, allowing for timing, tax and non-revenue receipts. Ask for the bridge between the two.
- Tax returns and accounts show different turnover. Ask which figure is correct and for the reconciliation.
- Large round-number transfers with connected parties. Ask for the contract or invoice behind each transfer.
- Debt in the accounts that does not match the registered charges. Compare the list of charges with the debt schedule and ask about any difference.
Litigation and compliance
- Pending cases not mentioned in management’s disclosure. Compare court and tribunal records with the company’s list of disputes. Ask about each case not disclosed. A name match needs to be confirmed first.
- Tax or statutory dues outstanding. Ask for the latest returns and payment evidence.
Behaviour in the process
- Reluctance to give consent for bank or tax records. Ask what the concern is, and whether the same information can be provided another way.
- Documents that arrive late, unsigned or in an unusual format. Ask for originals or for confirmation from the source.
- Answers that change between conversations. Record the answers and the dates.
How to use these
- Write down the record, its date and its source.
- Ask the company a specific, neutral question.
- Compare the answer with a second independent record.
- Pass anything that matters to your lawyer or auditor. Whether a finding has legal or accounting consequences is their call.
An absence of flags does not show a company is sound: records are incomplete and some matters are never recorded. See patterns for the kinds of mismatches that records checks bring up, and services for how Kubr compares claims with records.
Worked examples, described generally
Revenue and bank credits
A deck says annual revenue is a certain figure. The bank statements, with the company’s consent, show credits that total noticeably less over the same twelve months. Before treating this as a problem, build the bridge: some revenue may be received in cash or through another account, some may be booked but not yet collected, some credits may be netted against costs, and indirect taxes may sit in one figure and not the other. Ask the company for its own reconciliation and compare it with what you can verify. If the gap closes with documents, the flag is resolved. If it does not, the gap itself is the finding, worded as an unreconciled difference and not as an accusation.
Charges and the debt schedule
The registry shows a charge in favour of a lender that does not appear on the company’s list of borrowings. Possible explanations include a facility that was repaid without a recorded discharge, a guarantee given for a related company, or an omission from the schedule. Ask the company, and where possible ask the chargee to confirm the position. The record gives you the question and a reference; the answer must come from the parties.
Ownership that does not line up
The shareholder register shows one holder; the control information on the public record names another. This can follow a recent transfer that has not yet been filed, a nominee arrangement, or a filing error. Ask for the transfer documents and the dates, and check that the latest filing reflects them.
What is usually harmless
Not every irregularity matters. A registered address at a corporate secretary’s office, a change of auditor at a natural rotation point, a single late filing that was followed by a prompt correction, or directors who changed after a documented investment round are all common. A flag is useful when it appears alongside others, when the explanation does not match other records, or when the company is unwilling to explain. A single isolated signal, explained with documents, should usually be noted and closed.
Weighing flags together
Sort what you find into three groups: facts confirmed by two records, differences that have a plausible explanation awaiting a document, and open items with no explanation yet. Report each group separately so that the reader can see what is established and what is not. Avoid scoring or labelling the company; the purpose is to help the reader decide what to ask next, and a label can hide the detail that matters.
Phrasing the question
Neutral questions get better answers. “The registry shows a charge to this lender dated this month; can you send the facility letter and tell us the outstanding amount?” is more useful than “why have you not disclosed this?”. Cite the record, say when it was read, and ask for a document that would settle the point. Keep a log of questions and answers: patterns in how a company responds are themselves information, and a log protects both sides from misremembering.
For a sense of how findings and open questions are laid out in a report, see the illustrative sample report outline.
Sources
Primary registries and regulators referred to in this article:
- Ministry of Corporate Affairs (MCA), India
- GOV.UK: People with significant control (PSC) guidance
- U.S. Securities and Exchange Commission (SEC)
- The Insolvency Service (UK)
Kubr accesses bank and tax records only with the company’s consent.
This article is general information, not legal, financial or investment advice.