The Hidden Dangers of “Other” Accounts in M&A and Business Due Diligence

When buying a business or evaluating an investment, one section of the financials demands more scrutiny than it usually receives: the "other" accounts.

These accounts—"other income," "other expenses," "other assets," and "other liabilities"—can contain just about anything. Even under GAAP or IFRS audit standards, disclosures for these categories often lack clarity. In unaudited financials, they can be an opaque black box.

If these accounts are minimal—say, less than 1% of revenue or total assets—a cursory glance may suffice. But larger amounts deserve serious attention.

Such accounts typically exist because businesses need a catch-all for entries that don’t fit neatly elsewhere. Accounting systems require everything to be categorized, and when uncertainty arises, it lands in "other." However, placement in an ambiguous category does not diminish its potential significance—or danger.

Many deals have unraveled because of what was found in these accounts. Here are real-world examples that turned into deal-breakers:

• Foreign bribes hidden in expense accounts—clear violations of the Foreign Corrupt Practices Act.

• Payments to a mistress quietly recorded under miscellaneous expenses.

• Personal loans to owners and shareholders disguised as assets.

• Unpaid tax debts masked within liabilities, later exposing IRS liens against company assets.

• Income from a shadowy side business lacking licenses, tax IDs, or insurance—later revealed as a money laundering scheme.

• Fictitious assets fabricated by an accountant simply to make the books balance, which inevitably lead to fraud.

These are not just entertaining anecdotes; they are serious cautionary tales. In many instances, these issues not only terminated transactions but also triggered regulatory investigations, lawsuits, or even criminal charges.

Such problems often go undetected because people prefer not to probe too deeply. There is a common assumption that headline figures—revenue, cost of goods sold, EBITDA—tell the full story. While this may be true most of the time, the gravest risks often lurk in the obscure corners of the financials, hidden in vague "other" categories.

The core lesson here revolves around discipline. Acquiring a business means acquiring its risks along with its assets. A thorough understanding of every item on the balance sheet is essential to avoid stepping into a financial minefield.

There have been cases where diligent review of these categories revealed hidden off-balance-sheet benefits, such as:

• Unclaimed tax credits that could provide significant refunds or future savings

• Misclassified intellectual property with commercial or licensing value

• Forgotten contractual rights that could unlock revenue streams

• Refunds or rebates from suppliers or government agencies

One particularly memorable example involved a $2 million tax refund sitting unnoticed in "other current assets" simply because no one had bothered to investigate it.

In short, while these accounts can signal danger, they can also present hidden upside for those willing to look closely and ask the right questions.

The message is clear: unusual entries in "other" accounts should not automatically end a deal, but they do warrant rigorous investigation. Proper due diligence involves asking pointed questions, pressing for complete answers, and tracing the flow of funds. Every entry must be understood—not only to assess potential risks but also to identify hidden opportunities.

When encountering "other" accounts, indifference is not an option. Always ask what lies within. Then ask again. If the explanation remains unclear, keep digging.

Often, the details hidden in "other" accounts reveal more about the business than the main financial statements ever could.

Deals don't fall apart because of what is already obvious; they fall apart because of what hides in plain sight. "Other" accounts are where the skeletons tend to gather. They’re the dark corners of the balance sheet, the financial equivalent of an unlocked basement door in a horror movie. When they’re ignored, they have the power to blindside even the most seasoned buyers. But for those with the discipline and curiosity to ask tough questions, these accounts can also offer unexpected opportunities. Either way, they demand respect.

In the world of dealmaking, it isn’t the obvious numbers that define success—it’s the ability to uncover the ones others miss.