Due diligence isn’t just a checkbox activity—it’s the backbone of any successful investment deal. Investors dig deep into your financials, tax compliances, and internal controls to assess risk and potential. If you’re a startup or growth-stage business eyeing funding, be warned: a single red flag can derail negotiations, slash your valuation, or kill the deal entirely.
Here are the top 5 red flags that we frequently see during financial and tax due diligence that can turn investors away:
Top 5 Red Flags in Due Diligence That Kill Funding Deals
Unreconciled GST Liabilities
Many startups fail to reconcile their GST filings with books of accounts. This signals poor financial hygiene and a potential for future tax penalties. For investors, it’s a sign of non-compliance that might result in contingent liabilities—no one wants to inherit a ticking time bomb.
Unfiled Income Tax Returns
If your income tax returns are missing or delayed, that’s a big red flag. It raises questions about your company’s transparency and governance. Consistent tax filings are fundamental to trust and credibility in the eyes of a serious investor.
Payroll Tax Mismatch vs Headcount
If the number of employees on your books doesn’t match the payroll taxes paid, it sets off alarms. Whether it’s underreported headcount or improper contractor classification, this gap suggests either tax evasion or lack of control over HR finances.
No Trail for Investor Funds
Have you used previous investor money wisely and transparently? If there’s no clear audit trail, it creates doubt around fund utilization and financial discipline. Every rupee should be traceable—investors expect accountability.
No Revenue Recognition Policy
A lack of a formal revenue recognition policy can make your topline numbers look inconsistent or inflated. This not only affects valuation but also indicates immature financial practices, especially in SaaS or subscription businesses.
These aren’t just accounting errors—they’re signs of systemic issues that affect your valuation and deal viability.
How to Get Audit-Ready, Fundable and avoid Red Flags in Due Diligence: 5 Key Fixes
1. Quarterly GST Reconciliation with Financial Books
Pitchers Global ensures that every GST filing is meticulously reconciled with the financial books on a quarterly basis. By automating parts of the reconciliation process and conducting periodic checks, our team verifies that input tax credits, outward liabilities, and actual financial transactions are in complete sync—ensuring accuracy, reducing risks of mismatches, and enhancing investor and buyer confidence during due diligence.
2. Filing of All Pending Income Tax Returns (ITRs) & Documentation Maintenance
We prioritize regulatory hygiene. Our experts identify and file all pending ITRs for the company and its directors, ensuring there are no legacy compliance gaps. Additionally, we build and maintain a centralized documentation repository—covering tax filings, acknowledgments, and assessment orders—for ready access during investor scrutiny or deal audits.
3. Payroll vs HR Records Audit & Anomaly Correction
Pitchers Global conducts routine audits that match payroll disbursals against HR data like attendance, contracts, and offer letters. Discrepancies—such as ghost employees, incorrect deductions, or missing KYC—are flagged and resolved promptly. This transparent process protects against compliance risks in PF, ESIC, and TDS, and reinforces the credibility of your operational metrics.
4. Maintenance of Investor Fund Utilization Reports
To ensure investor trust and transparency, we prepare detailed fund utilization reports that map the source of each investment to its final application—whether capex, working capital, or marketing. These reports include timeline-based deployment insights and ensure alignment with investor expectations and legal representations made during fundraising.
5. Adoption & Documentation of Industry-standard Revenue Recognition
We help businesses implement revenue recognition policies in line with IND-AS/IFRS or relevant local standards. Whether your model includes SaaS, milestone billing, or performance-based recognition, we document these policies and ensure they’re consistently applied—an essential part of any financial due diligence or audit process.
At Pitchers Global, we conduct founder-friendly due diligence that meets investor expectations while supporting your growth.