Companies that refer to trade secrets in their Form 10-K annual reports are at greater risk of cyberattacks from criminals who are intent on uncovering them, according to a team of accounting researchers.
The research, by Michael Ettredge and Yijun Li of the University of Kansas and Feng Guo of Iowa State University, is expected to be presented at the forthcoming annual meeting of the American Accounting Association next month.
To reduce theft, the researchers recommend that companies avoid disclosing the existence of trade secrets in their 10-K annual reports. Drawing on data from approximately 7,500 companies over nine years, the study found that about one-third of their 10-Ks mentioned the companies possessed trade secrets. Even though the companies usually didn’t go into detail about the trade secrets, just revealing their existence increased the chances of a cyber-breach by an average of approximately 30 percent.
The chances of further cyber-breaches was most likely to occur at younger companies, companies with fewer employees and companies operating in more competitive industries.
The researchers acknowledged that deciding not to mention trade secrets could be difficult for many companies, as simply acknowledging trade secrets doesn’t impose any direct costs on a company and could boost its stock value. They also pointed out alluding to trade secrets in a 10-K can provide evidence in case of later litigation alleging misappropriation.
“Given such advantages, managers may well be reluctant to forgo the opportunity of revealing in their annual reports that they have trade secrets to protect,” Ettredge said in a statement. “Since the number of breaches in our sample amounted to less than 5 percent of the total 10-Ks containing allusions to trade secrets, the relationship we’ve discovered is something of a black swan. But should the black swan land, it could be disastrous for a company, and our findings suggest that the chance of its landing increases by almost one third when the existence of trade secrets is disclosed.”
While disclosure of trade secrets might seem to be worth the increased risk of a cyber-breach, the new study suggests that disclosure does significantly increase that risk.
