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Risk Factor Report

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  • 1. 2012 www.bdo.com Contact: Tim Clackett Los Angeles 310-557-8201 / tclackett@bdo.com Slade Fester San Jose 408-352-1951 / sfester@bdo.com Hank Galligan Boston 617-422-7521 / hgalligan@bdo.com Aftab Jamil Silicon Valley 408-352-1999 / ajamil@bdo.comSupply and Demand: Potent Doug Sirotta Silicon ValleyRisks for Tech Companies 408-278-0220 / dsirotta@bdo.comin 2012 Ryan Starkes Woodbridge 732-734-1011 / rstarkes@bdo.com The 2012 BDO RiskFactor Report for Technology Businesses examines the risk David Yasukochi factors listed in the most recent SEC 10-K filings of the 100 largest publicly Orange County 714-913-2597 / dyasukochi@bdo.com traded U.S. technology companies. The risk factors were analyzed and ranked in order of frequency cited.I u  atural Disasters, N n the past year, a number of events highlighted the significance of certain business and operational risks facing Breaches Heightentechnology companies and the need for Prospect of Businesseffective risk management policies. Natural Interruptiondisasters and political unrest exposed the Tech companies across the globe were put onvulnerabilities of integrated supply chains. notice when a devastating earthquake hobbledAnd a still-sluggish economy heightened Japan’s Fukushima Daiichi nuclear reactor lastuncertainty over demand for new products year. The subsequent fallout, as well as severeand services. To stave off fierce competition flooding in Thailand, storms in the Philippinesin the year ahead, executives will drive and prolonged conflict across the Middle Eastinnovation, albeit cautiously, while diversifying and North Africa—all of which compromisedsupplier networks in an effort to insulate their essential infrastructure—highlighted for manycompanies from future shocks to the global in the industry the risk of sudden businesseconomic system. interruptions. Two years ago, just over half  Read more
  • 2. 2 BDO 2012 RiskFactor Report for Technology Businesses“Data breaches can be very costly to the business and have a significant negative impact on a company’s reputation andbrand. Leading companies are looking for ways to manage the risk associated with both cyber security and sole-sourcedsupplier relationships,” said Clark Schweers, managing director at BDO Consulting and head of the firm’s InsuranceClaim Services practice.of companies (55 percent) cited naturaldisasters, wars and terrorist attacks among Business Interruption Risks Loom Largetheir concerns; this year, nearly nine-in-10companies (88 percent) named the same 100%factors as risks to their business operations. 90%Concerns over data security and breachesof technology also skyrocketed this year, 80%as a slew of hacking incidents rattled techcompanies, credit card giants and government 70%agencies. Seventy-one percent of companies 60%listed technology breaches and datasecurity as risk factors in 2012, up nearly 30 50%percentage points from 2010, when just 44percent of companies cited similar concerns. 40% 30%u upply Chain S 2010 2011 2012Disruptions Remain a Natural disasters, war, conflictsConcernThe tech industry’s growing reliance on Maintenance of infrastructure and information systemsthird-party suppliers is reflected in rising Breaches of technology and data securityconcerns over both potential disruptions tothose networks (88 percent) and the financialwell-being of vendors (64 percent). Ongoingdisputes over “rare earth” metals and the Supply Chain Risks Continue to Escalaterising cost of raw materials also served toheighten supply chain-related risks. Tech 100%companies would be wise to further diversify 90%their suppliers in the year ahead to protect 80%against potential disruptions. 70% 60%u  ew Product N 50%Development Pressures 40%Mounting 30%Tech companies are increasingly concernedabout the R&D phase of product 20%development. With a constant stream of 10%new products and software updates flooding 0%the market, tech companies must innovate 2010 2011 2012or risk losing market share to competitors.For the fifth year in a row, competition is the Supplier and vendor concernstop-ranked risk factor, and tech companies Equipment failure and product liabilityalso note rising concerns over their ability to Credit worthiness and financial risk of suppliers and vendorsdevelop new, innovative products and services Price and availability of raw materialsto meet growing customer demand.  Read more
  • 3. BDO 2012 RiskFactor Report for Technology Businesses 3“Technology is moving so fast now, that the product lifespan has shrunk dramatically and that’s a fundamental businessrisk,” Aftab Jamil, partner and national director of the Technology & Life Sciences Practice at BDO USA, told The WallStreet Journal. “If you misread what those trends are or your timing is not aligned with what the market demands, there willbe consequences for that.”u  ounting Legal M Product Development Risks Rise Amid Heavy Competition for CustomersChallenges RaiseVisibility of IP 100%Infringement 90%Intellectual property (IP) infringementconcerns among tech companies rose again 80%this year. Eighty percent of companies saidthey were wary of IP infringement, likely 70%bolstered by a slew of high-profile legalbattles and continued focus on patent 60%violations in China. With the specter of IPbreaches at record levels for the study, it is no 50% 2010 2011 2012surprise that tech companies say they are alsoincreasingly prepared to face litigation in the Competitionyear ahead; 83 percent cited legal proceedingsas a risk. Development of new products and services Customer demandu  ngoing Legislative OChanges, AccountingChallenges CauseAnxietyConcerns over government regulations are at bring more capital into the market and enable “Acquisitions are a key strategy for more acquirers. Amid heavy deal activity,an all-time study high. With the presidential companies to grow and thus increase more companies (88 percent, up from 85election looming, a cyber security bill pending, their value. However, acquisitions can percent in 2011) cite concerns over theirand continued challenges around the roll outof the Dodd-Frank Act top of mind, nearly all ability to successfully complete and integrate be risky, and if the fit is not right, then acquisitions. Tech companies are also more the acquiring company could alienatecompanies (98 percent) cite regulation as a wary of anti-takeover and change-in-controlrisk. Compliance with new revenue recognition the new employees and ultimately do provisions that may make it more difficult forrules and other accounting challenges likelycontributed to the 19 percent increase in a third party to acquire them, even though more harm than good,” said Thomas it may be favorable to shareholders. Thirty- Zambito, senior vice president atcompanies noting concern over accounting eight percent of companies cite these risks,standards and maintaining effective internal up from 28 percent in 2011. With acquisition BDO Valuation Advisors.controls (69 percent versus 58 percent in a key strategy this year, access to capital2011). and financing remains a top priority. While the BDO 2012 Technology Outlook Surveyu ompetition Fuels M&A C found that tech CFOs are more confident in their ability to access capital this year, mostActivity as Liquidity companies (69 percent) continue to safeguardConcerns Linger themselves against a volatile market by notingThe tech industry is primed for another uptick access to financing as a risk.in acquisition activity. Facebook’s Instagramdeal is fueling competition among the majorindustry leaders to grow patent portfolios,and the recently passed JOBS Act aims to  Read more
  • 4. 4 BDO 2012 RiskFactor Report for Technology Businesses The Top 20 Risk Factors of the 100 Largest U.S. Technology Companies 2012 2012 2011 2010 Rank 1. Competition and consolidation in tech sector; pricing 99% 97% 94% pressures 2. U.S. general economic concerns 98% 96% 93% 2t. Federal, state or local regulations 98% 96% 88% 4. Failure to develop or market new products or services 93% 88% 94% 5. Predicting customer demand and interest, innovation 91% 85% 63% 6. U.S. and foreign supplier/vendor and distribution concerns 88% 86% 75% 6t. Failure to properly execute corporate strategy 88% 93% 68% 6t. Management of current and future M&A or divestitures 88% 85% 86% 6t. Natural disasters, war, conflicts and terrorist attacks 88% 81% 55% 10. Threats to international operations 85% 85% 83% 11. Legal proceedings 83% 86% 80% 12. Ability to attract or retain key personnel 82% 82% 83% 13. Intellectual property infringement 80% 79% 74% 13t. Equipment failure and product liability 80% 75% 64% 15. Cyclical revenue and stock fluctuation 76% 70% 57% 16. Inability to maintain operational infrastructure and systems 73% 68% 42% 17. Breaches in technology security or privacy 71% 57% 44% 18. Inability to acquire capital or financing 69% 68% 55% 18t. Accounting, international controls and Sarbanes-Oxley 69% 58% 54% compliance 20. Credit or financial risk of customers, vendors or suppliers 64% 61% 48%t – indicates a tie in the risk factor ranking About the Technology & Life Sciences Practice at BDO USA, LLP BDO has been a valued business advisor to technology and life sciences companies for over 100 years. The firm works with a wide variety of technology and life sciences clients, ranging from multinational Fortune 500 corporations to more entrepreneurial businesses, on myriad accounting, tax and other financial issues. About BDO BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through more than 40 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multinational clients through a global network of 1,118 offices in 135 countries.   BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more information, please visit: www.bdo.com.  Material discussed is meant to provide general information and should not be acted upon without first obtaining professional advice appropriately tailored to your individual circumstances. To ensure compliance with Treasury Department regulations, we wish to inform you that any tax advice that may be contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or applicable state or local tax or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein. © 2012 BDO USA, LLP. All rights reserved. www.bdo.com  Read more