Quality of Earnings: A Red Flag is raised by Companies that restate their earnings and have high accruals
A study by two Wharton Professors----Why Firms Restate Annual Earnings and Why Investors Should Beware.
Net Income, Cash Flow, and Accruals (the accrual method of accounting):
The portion of net income that is not accounted for in cash flow is known as accruals; and whenever net income grows faster than cash flow, accruals are the cause. While many elements of accruals are perfectly proper, accruals also leave room for accounting gimmickry or 'earnings management'---fudging numbers to inflate income.
So, that is what they do.
Here is how they do it---Four ways companies can manipulate earnings through the use of accruals: (the numbering is mine)
Earnings can be inflated through accruals in many ways. (1) A company might exaggerate its revenues or count money that is expected but not in hand. (2) It might exaggerate accounts receivable, perhaps ignoring the fact that orders for future delivery can be cancelled. (3) A company can pump up sales by offering customers easy credit, but not account for the fact that customers who are not creditworthy may fail to pay. (4) A company might build up inventories toward the end of the year, making production figures look good but saddling itself with excess product that will have to be discounted to be sold, hurting future results.
Okay fellow investors, this means we should check the growth rate of Net Income vs the growth rate of Cash Flow (amount for this year - amount for last year ÷ the amount for last year x 100 = percentage of growth from last year to this year).
If Net Income is growing faster than Cash Flow, the question is why. Is it a legitimate reason or not? Is the difference in growth rates for one year or for two or three years?
10:20:03 PM 
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