Why Investor Clients Should Beware of 10-Ks

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Here’s an interesting twist on the growing cybersecurity furor: sophisticated cybercriminals can hack company databases if trade secrets are mentioned in 10-Ks, according to a new study from the American Accounting Association.

Many clients of accountants and financial advisers are investors to one degree or another, likely in mutual funds, stocks and real estate. Whatever investment avenue they choose, savvy clients will heed the 10-K filings of the companies whose stocks they hold.

Those 10-Ks can be a trove of company information, including trade secrets. But while company patents have to be disclosed, trade secrets don’t. They also don’t have the legal protections that patents do.

There are plenty of examples of such trade secrets, for example: 

  • Google’s search algorithms
  • Coca-Cola’s ingredients
  • Big Mac’s special sauce
  • the process to produce the lubricant WD-40

A 2016 report from the U.S. Chamber of Commerce estimated that public U.S. companies own $5 trillion in trade secrets, according to the study. An earlier survey by the U.S. Census Bureau, comparing firms’ valuation of trade secrets and patents, indicated that they are three times more likely to consider trade secrets very important. And a survey in Europe found that companies consider secrecy more valuable than patents when it comes to protecting innovations.

With such high stakes in play, “trade secrets are most likely to be stolen not by amateur hackers or informal hacker groups but by well-trained and well-supported hackers on behalf of companies that can use such information,” the study indicates.

The study’s findings are based on an analysis of the relationship between companies’ references to trade secrets in their annual 10-K reports from 2006 through 2014 and whether breaches occurred within the following year.

A total of 39,992 10-Ks from about 7,500 companies were included in the study’s analysis. Of those, 12,542 mentioned trade secrets, and 591 breaches were identified. The trade secrets concerned methods and formulas but also confidential customer information, such as the Target breach in 2013.

The majority of breaches concerned the finance, insurance and real estate industries, followed by the service industries and manufacturing.

Trade secrets are a key tactic in which firms create and maintain value. The ability to prevent those secrets from being stolen or copied is integral to the company’s longevity, the study states.

The study’s authors found that their results were more affected if companies were younger with fewer employees, or operating in less competitive industries.

Trade-secret theft has become a serious threat to the U.S. economy, and damages the gross domestic product by 1 to 3 percent, according to the study. Just revealing the presence of trade secrets increases the chances of a breach by an average of about 30 percent.

The study was done by Michael Ettredge and Yijun Li of the University of Kansas School of Business, and Feng Guo of the Iowa State University College of Business.

About Terry Sheridan

Terry Sheridan

Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.

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