Regulatory Uncertainties Threaten Tech’s Innovative Flight, BDO Study Finds

August 2017

Krystal Le
Bliss Integrated Communication

Tech Executives Cite Regulatory Compliance, International Threats & Innovation Burnout as Top Risks

Chicago, IL – Technology revolution and trade regulation. Innovation and immigration. Sky-high valuations and cybersecurity. These are just a few of the forces shaping tech industry opportunities and risks in 2017, according to BDO’s 2017 Technology RiskFactor Report. While the pace and promise of innovation has never been higher, so too is the level of uncertainty and concern surrounding evolving domestic and international regulations and increased competition.
The 2017 BDO Technology RiskFactor Report, which analyzes the risk factors listed in the most recent SEC 10-K filings of the 100 largest publicly traded U.S. technology companies, found that all tech companies cite compliance with federal, state and local regulations as the number one risk for the third year in a row. More specifically, tech companies worry about failing to comply with changing accounting and financial standards (87 percent); cyber and data privacy regulations (78 percent); various anti-corruption laws (74 percent); environmental, health and safety regulations (70 percent); and differing tax laws in domestic and foreign jurisdictions (69 percent).

The report also found that the threat of competition and innovation burnout remain high for tech companies, with 95 percent concerned about their ability to develop or market new products and/or services, up from 83 percent last year. Meanwhile, 65 percent of companies list concerns associated with entering emerging markets and product diversification, marking an increase from 50 percent in 2016. The pressure for tech companies to differentiate themselves has skyrocketed, as market saturation threatens the reign of even the best and the brightest.
“The speed at which the tech sector is disrupting entire industries and creating new business opportunities has never been greater, fueled by an optimistic investment environment and a constant appetite for innovation,” said Aftab Jamil, assurance partner and leader of BDO’s Global Technology practice. “Nevertheless, the regulatory uncertainties introduced by a new U.S. administration, in addition to other global changes, have led many tech companies to step back and reassess their risk mitigation strategy for this year.”
The following chart highlights the top 25 risk factors cited by the 100 largest publicly traded U.S. technology companies:
2017 Rank Risk Factors 2017 2016 2015 2014 2013 2012
#1 Federal, state or local regulations 100% 100% 100% 98% 96% 98%
#1t Breaches of technology security, privacy or theft 100% 100% 96% 91% 81% 71%
#1t Competition in the tech industry, pricing pressures 100% 98% 100% 99% 95% 99%
#1t U.S. general economic conditions 100% 95% 94% 95% 92% 98%
#5 Threats to international operations and sales 98% 96% 96% 89% 82% 85%
#6 Management of current and future M&A and divestitures 97% 98% 99% 94% 88% 88%
#7 U.S. and foreign supplier/vendor and distribution concerns 95% 92% 90% 93% 84% 88%
#7t Legal proceedings, litigation 95% 89% 93% 91% 74% 83%
#7t Failure to develop or market new products or services 95% 83% 89% 84% 75% 93%
#10 Corporate copyright, IP infringement, trademark violations 94% 89% 93% 88% 79% 80%
#11 Natural disasters, war, conflicts and terrorist attacks 93% 90% 86% 89% 75% 88%
#12 Ability to attract or retain key personnel 92% 91% 95% 81% 80% 82%
#12t Predicting customer demand and interest, innovation 92% 90% 90% 92% 83% 91%
#12t Failure to properly execute corporate strategy 92% 84% 95% 91% 87% 88%
#12t Equipment failure and product liability 92% 81% 86% 82% 69% 80%
#16 Ability to maintain or implement operational infrastructure 88% 81% 87% 79% 71% 73%
#17 Accounting, internal controls and compliance standards 87% 83% 92% 79% 65% 69%
#18 Labor concerns 83% 75% 64% 83% 55% 56%
#19 Indebtedness 82% 75% 72% 74% 65% 50%
#20 Goodwill impairment 80% 73% 67% 57% 39% 31%
#21 Variable revenue and stock fluctuation 79% 76% 69% 70% 62% 76%
#21t Inability to acquire capital, credit ratings 79% 69% 68% 74% 57% 69%
#23 Failure to comply with FCPA, anti-corruption and anti-bribery laws 74% 58% 58% 48% 29% N/R
#24 Environmental, health and safety regulations and liability 70% 51% 56% 52% 46% 48%
#25 Introduction into developing and emerging markets and industries; product diversification 65% 50% 36% 47% 35% 41%
*t indicates a tie in the risk factor ranking
**N/R indicates not ranked                                      
Additional findings from the 2017 BDO Technology RiskFactor Report include:
Security Risks Show Staying Power
In less than a decade, cybersecurity has gone from a blip to a beacon, becoming one of the top risks cited by technology companies.
  • In 2009, just 30 percent of tech companies disclosed information security risks; now, for the second year running, 100 percent point to cybersecurity and privacy breaches as a top concern.
  • 88 percent note concerns around their ability to maintain IT systems and infrastructure.
  • 78 percent worry about compliance with cybersecurity and data privacy regulations.
Trump’s Tax Policies Remain Top of Mind
Where regulations are concerned, uncertainties regarding President Trump’s potential tax policies and their implications reign supreme this year on tech companies’ list of risks.
  • Nearly all (97 percent) cite exposure to additional tax liabilities as a risk because of changing state and local, national and/or global tax laws.
  • 69 percent worry about complying with differing tax laws in domestic and foreign jurisdictions.
  • 41 percent express concerns over potential changes to U.S. tax policy.
“U.S. tax reform—including potential changes to the current corporate tax rate and available tax credits, the introduction of a tax holiday and more—has major implications for tech companies,” said David Yasukochi, Tax office managing partner and member of BDO’s Technology practice. “As the industry waits to see whether these policies will come to light, it is important for companies to identify possible risks that may emerge and anticipate a potential action plan for each.”
What Status Quo? Tech’s Global Risks Reach an All-Time High
As the international political system hangs in the balance—and waves of protectionism threaten to upend the status quo—tech companies’ 10-Ks reveal an industry increasingly concerned with international operational risks.
  • Almost all (98 percent) cite threats to international operations and sales, including those stemming from business, political, tax, currency and protectionist variables.
  • 44 percent mention Brexit specifically as a potential risk to their business this year.
  • Nearly half (46 percent) worry about their ability to expand abroad, compared to 34 percent in 2016, 17 percent in 2015 and 7 percent in 2008.
The Tech Talent Search Heats Up
Tech companies understand that a strong corporate culture is vital to creating competitive products. As a result, 2017 is seeing the battle for top tech talent ramp up.
  • 92 percent of tech companies worry about their ability to attract and retain key employees.
  • 83 percent cite labor concerns, including employee retention, immigration and outsourcing—up from 75 percent last year and 64 percent in 2015.
  • Nearly one-fourth (25 percent) worry about their ability to maintain their corporate culture.
For more information, view the full report here.

About the Technology Practice at BDO USA, LLP

BDO has been a valued business advisor to technology companies for over 100 years. The firm works with a wide variety of technology clients, ranging from multinational Fortune 500 corporations to more entrepreneurial businesses, on myriad accounting, tax and other financial issues.

About BDO

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