Tech Industry Hits Turning Point with Uncertain Financial Future

Estimated reading time: 4 minutes

Growth in the tech industry has hit a temporary speed bump as the market recovers from the rough start to the year and more caution from investors. The 2016 BDO Technology RiskFactor Report, which analyzes the risk factors listed in the most recent SEC 10-K filings of the 100 largest publicly traded technology companies, found that over three-quarters (76%) of technology companies cite uncertain financial performance as a top risk, up seven percentage points from last year.

"We're seeing a shift in mindset as the industry responds to market volatility and more stringent rules and regulations,” said Aftab Jamil, partner and leader of the Technology and Life Sciences Practice at BDO USA, LLP. “In this environment of uncertainty, companies are reassessing their risk tolerance, cutting down on unnecessary extravagances and buckling down on strategy. This will be a year that the tech industry slows down to speed up."

The report also found that all 100 of the largest U.S. public tech companies cite risks related to cybersecurity in their annual filings, up from just 30% in 2009. And, as government regulators step up scrutiny of cyber preparedness, 51% of companies specifically cite cyber regulations as a risk factor, reflecting not only the growing cyber threat but potential sanctions for inadequate defense measures.

"The technology industry gets to play the role of hero and villain in the world of cybersecurity. The advances we've seen in machine learning and threat intelligence is rightfully credited to innovation in the tech sector,” said Shahryar Shaghaghi, national leader of BDO Technology Advisory Services and head of International BDO Cybersecurity. “At the same time, any cyber incident that occurs is the result of a vulnerability or flaw in technology. While the onus is partly on the user entity to implement the appropriate protocols and policies, the technology manufacturer or service provider does share in the blame―whether or not it's warranted."

Additional findings from the 2016 BDO Technology RiskFactor Report include:

Regulatory Concerns Mount. Concerns related to federal, state or local regulations tied with cybersecurity as the most frequently cited risk factor this year, listed by all 100 companies analyzed. This aligns with the 2016 BDO Technology Outlook Survey, in which tech CFOs ranked policy and tax changes as one of their biggest challenges in 2016. And with the U.S. election cycle in full swing, a new administration also raises questions about the future of government initiatives and spending plans. This year, 57% of technology companies cite the loss of government contracts, spending or incentives as a potential risk, up 10 percentage points from 2015.

Competition Intensifies. Nearly all of the largest U.S. technology companies (98 percent) cite risks related to competition in their annual filings. The war for top tech talent continues to heat up as the industry faces an ongoing shortage of skilled tech workers and a tough hiring environment. Ninety-one percent of companies cite attracting and retaining key personnel as a risk factor, ranking as the eighth highest risk overall. Competing to innovate is also a top challenge, with 83% citing the risk of failure to effectively develop or market new products or services and 50% citing risks related to entering into new markets and product diversification.

International Risks Peak. Among the 100 largest U.S. technology companies in our study, 68 operate in more than 20 countries, and for the first time, we analyzed their unique risks to uncover the growing challenges impacting tech companies with a large, multinational presence. While the top risks (regulations and cybersecurity) are the same across all companies analyzed, threats to international operations and sales jumped to the third most-cited risk for these global companies, compared to the fifth most-cited overall.

Compliance Matters. In the wake of heightened regulatory scrutiny and changing laws, 83% of technology companies cite accounting, internal controls and compliance risks in their filings. The Public Company Accounting Oversight Board (PCAOB) has stepped up its scrutiny on internal control procedures and testing, following a significant rise in tax and financial reporting control deficiencies over the last few years. In addition, the Financial Accounting Standards Board (FASB) has announced a number of Accounting Standard Updates that technology companies are in the early stages of implementing.

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, 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 63 offices and more than 450 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of 1,408 offices in 154 countries.