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- NetScout Systems Inc. Inherent Risk Factors
NetScout Systems, Inc. is the market leader for the advanced network, application and service assurance solutions. Some of the solutions they provide propel the evolution of new computing fields such as virtualization, mobility, and cloud. It also manufactures and market Internet Protocol-based items in combined hardware and software solutions for use in business enterprises, big government arms and companies that provide telecommunication services all over the world. With outstanding twenty-five years of technology development sector, NetScout is among the leading companies in performance management market thereby transforming the delivery nature of business software and services, and give the user good experience across global IP networks. The company focuses on driving technology innovation within its product investment to solve the needs of its clients by giving solutions to manage dynamic system and application environments. The company global market is through direct sales and through partners that include distributors, resellers and systems integrators. It has three primary customer groups, that is, enterprise customers, service provider customers and government customers. All this successful global management of NetScout Systems Inc. has an operational base at the corporate headquarters located at 310 Littleton Road, Massachusetts. Furthermore, NetScout Systems Inc. is a listed company with many subsidiaries globally. It has a competitive advantage over its rivals in the same industry such as HP, IBM and many others (Form 10-K pg. 3-12; Exhibit 21).
Keywords: NetScout System Inc., service, internet protocol (IP), technology, globally.
The business community view risk as an occurrence, from sourcesinternal or external to an organization, which may affect the achievement of objectives, that is, income generation. Any business organization, especially the multinationals, must be at risk of operational factors that may reduce their revenues. Therefore, assessing the risk of material misstatement enable auditors examine the feature, timing, and degree of further audit procedures crucial for collecting evidence about the accuracy of the firm’s income statements such as income statements. Broadly, there are two major forms of risks namely: control risk and inherent risk. Inherent risk, therefore, is the probability that material misstatement, either fraud or an error will occur in the account balance or class of transactions (Thibodeu et al., 2015 p 53). This study will look at the inherent risk factors in relation to NetScout Systems Inc. and advice future audit strategies.
NetScout Systems Inc. inherent risk factors
It is public knowledge that NetScout Systems Inc. enjoys a competitive advantage over the rest of industry players. Furthermore, its profits are high, but just like other business it has inherent risk factors that may reduce future incomes if not neutralized. A study of item 1A in the company’s most recent form 10-K filed with SEC reveals the following inherent risk factors:
One, due to the nature of their business, they have a high risk concerning quick transformations that may include changes in technology, short product life, or interest rates. Consequently, there is mounting pressure to report erroneously with the intention creating a falsifying impression to the stakeholders that they are ahead competitor. If the competition updated or improved an equivalent piece of technology that NetScout Systems Inc. is using, then they could experience acute decreases in their margins.
Another inherent risk of this company involves the way in which they value heir inventory. As stated in their 10k, their stock value may be lower compared to the real cost or net achievable figure. However, typically a company should value their inventory based on the principle of lower of cost or market. Net realizable value is only a segment of this policy because it is the upper limit, though a lower limit or the net realizable value minus the usual is a consideration before to calculate the market amount. As a result, it creates an opportunity to misstate under the valuation assertion of the inventory.
Regulations and bureaucracy
The nature of regulations and bureaucracy installed in various regions or nations vary sharply and how multinational companies deal with such determines the magnitude of inherent risk. For example, if NetScout Systems Inc. violates the U.S. Foreign Corrupt Practices Act or applicable anti-bribery laws in other countries, or fail to comply with U.S. export controls, its operations may stall international revenue. Foreign governmental authorities in other may seek to impose civilly and criminal penalties for such violations, thereby adversely affecting business operations, financial conditions, and cash flows. Consequently, the error can occur in the financial statements. Future auditors of NetScout System Inc. will have to look into the regulatory conditions in the countries where NetScout System Inc. operates before making conclusions.
NetScout Systems Inc. draws customers from many industries such as financial sectors, public sector, pharmaceuticals and the service industries. Economic recession, political unrests or adverse geographical patterns may have a negative impact on the performance of such industries. Similarly, federal, state and local budget decisions may affect public customers. If anything affects the NetScout Systems customer base, financial condition, and cash flows will reduce, and misstatement of the financial statement may occur. The future auditing process should look at the trend in the market segment of NetScout Systems to verify if the sales estimate concurs with existing customer base.
The performance of NetScout Inc.partly depends on the global economy index. Global economic recession and shrink in the global credit market may reduce its revenue because customers may have no choice but to delay, cancel or reduce their capital expenditure on technology projects. On the other hand, particular industry sections, for example, government and telecommunications companies may be resilient to the effects of an economic meltdown. If the volatility of financial markets persists, customers may have limited ability to get adequate finance hence decrease in sales volume and revenue of NetScout Systems. Still, rivals may react to economic conditions by strategically reducing their prices thereby putting pressure on the pricing and reduce order levels. If such happens, misstatement may occur in accounts receivables and inventory accounts. Future auditing mechanism should look into such loophole of economic disruption effect and verify whether a generalization made due to economic slowdown have an effect on the income statement. In addition, a client-level risk associated with this issue is the company’s use of derivatives and hedging. NetScout international operation and internal business operations expose it to fluctuations in foreign currency exchange rates. These coins include, of course, the US dollar, Indian rupee, and South African Rand consequently creating complexity from multiple exchange rates and currencies, which creates an opportunity to misstate. The overal effect will impact on value assertion of determining the values of the currencies.
Stock prices fluctuations and capital
NetScout Systems stock prices may fluctuate with market instability. According to the recent form 10-Kof NetScout Systems filed with SEC, Its common stock market price is volatile and may not stabilize soon due to increased uncontrollable factors. In fact, if Security Exchange Market slowdown persists, the company capital accounts may reduce and susceptible to the misstatement in the income statement. Furthermore, stockholders have been may institute litigation against NetScout System Inc. that could make the company incur costs defending the lawsuit there by exceeding the stipulated insurance cover for such risks. Additional costs may result from the public relation actions that the management may decide on to save the company brand after such litigation. (Current stock information referenced from the company website)
NetScout Systems may fail to source necessary additional financing to support growth and operations. Furthermore, any extra capital may have unfavorable terms and conditions may consequently lower stockholder power. In such scenario, misstatement may occur in interest accounts and amortizations. All the above instances may bring unforeseen costs that may lead to distortions. Tracing such unexpected expenses related to stock and capital should be of concern to future auditing team at NetScout Systems Inc.
NetScout Systems Inc. effective tax rate may increase or fluctuate given that they operate in different regions with variable tax rates. The company may experience variable tax rates because one, tax laws, regulations, and interpretations change depending on jurisdictions of operations. Second, accounting and interpretation of tax on shares; associated valuation allowance on these assets vary from country to another.
The effect of tax accumulations due expenditure accounting for acquisitions and redesigning charges may result in variation between reporting periods. Additionally, tax evaluation or associated tax interest or penalties that may primarily have an effect on revenue tax expense for the financial years in which the payments take place. The Increasing tax rate may increase income tax expenditure account and further reduce net revenue account. Future auditing teams should take keen consideration on the factors affecting tax rates for the various NetScout System Inc. subsidiaries before making comments.
Selection and applications of accounting principles
NetScout Systems Inc. and its branches may use inaccurate estimates and judgments related to crucial accounting policies. According form 10-K filed with SEC, NetScout System Inc. uses accounting policies applying to shares, income identification, valuation of goodwill and generated services and share-based reward significant. The management makes accounting judgments and estimates related to such systems. If inaccuracy happens, NetScout Systems Inc. operating results and financial condition may be at risk. Future financial presentations could have misstatements error or fraud. Fraud may occur in that some management member may notice the inaccuracy early but willing sit on it while taking advantage of the situation to commit fraud. Such a fraud can cause significant shake in the top management if detected and have far much reaching legal implications that may tarnish the company’s brand and public image. Next auditors should assess the effect of accounting policies on the income statement.
In addition, the subsidiary that NetScout is in control is something of consideration too. More precisely, they have recorded the acquisition of five other companies within a three-year period. These include ONPATH Technologies, Inc., Accanto, Simena, Fox Replay, and Psytechnics, which all seem to be at par with the existing company’s operations. However, the company may use its best estimates and assumptions as part of the price allocation process in order to value the assets acquired, and the liabilities assumed. But still its estimates can be wrong and are subject to refinement. The use of estimates and assumptions may create an opportunity to misstate.
In the form 10-K item 1A, NetScout Systems Inc. management admits that they rely on limited source suppliers. Specific parts, such as network interface cards and proprietary NetScout hardware essential for the device integrating the company’s equipment comes from outsourced suppliers or a limited group of suppliers. The overreliance on sole or limited suppliers poses several risks, such as failure to get enough supply of required items, monopoly in pricing, quality and timely delivery of components. The implication is that the failure of supply could result in deliveries inadequacy or trigger the hunt for alternative sources that would affluence on shipping ability of products on a timely basis. Current and potential customer relations may suffer a setback because of non-punctual deliveries and prospective customers. The subsequent effect on the account receivables may affect revenue and misstatement error. The error may be because of fraud and overpricing due to the desperate nature of the company at that instant. Future auditing team should, therefore, review the list of suppliers and verify if mechanisms of reducing reliance on limited supply source are in place to reduce associated misstatement.
While analyzing more extensively into the company’s accounts receivable by further reviewing the 10k, it reveals that this company shows an inherent risk of overstating this account. For instance, since the company claims that they have a good reputation regarding collection of money from its resellers, the Company does not maintain any reserves for reseller product returns. In other words, they do not maintain an allowance for doubtful accounts or any bad debt expenses, which makes them more at risk of overstating their accounts receivable through the existence/occurrence assertion.
NetScout Systems Inc. success heavily on their ability to protect intellectual property rights that they own. The company has copyright, patents, innovation secrets and registration details to keep safe. Additionally, non-disclosure or important contracts and license agreements need protection, and not forgetting the intellectual property rights. However, some rivals may use acute competitive mechanisms, unauthorized copying, or other interference of NetScout Systems Inc. intellectual property. Such a move may enable third parties to benefit from the company technology without paying. Furthermore, Legal proceedings to enforce the company intellectual property rights may be expensive and highly uncertain. In addition, growth may take a back seat if legal action is still on and that may affect the revenue accounts. Furthermore, NetScout Systems Inc. also get software from other partners for the integration of its products. As a result, if any of the partners stops supply, the company might experience delays in product export before alternative software is in place.
Still, some companies may claim that NetScout Systems Inc. infringe on their intellectual property titles or related royalties such as the trademarks among others. Such claims may make NetScout Systems Inc. spend substantial sums in litigation irrespective of their truthfulness. Payment of damages may slow product exports, redesign of products, rebranding and remarketing to regain the lost brand legacy. Consequently, the company may suffer massive financial loss or time wastage.
Legal fees for court proceedings misappropriation may occur. Rebranding and getting new trademarks, and copyrights consume time hence lot of miscellaneous expenses from which greedy employees are tempted to commit fraud making the company expense account may read higher than average figure due to misstatement. (Form 10-X item 1A, and 8K)
Future auditing team should evaluate NetScout Systems Inc. past litigation costs and check on the provisions allocated for any patent rights infringement if any. If such requirements are missing then, the management needs advice to start creating room for such provisions in anticipation of any occurrence of that kind and reduce future misstatements. (Form 10-K Item 1A)
New products and competition
If NetScout Systems Inc. if fail to introduce new products or improve the current products to be at par with the rapid technological change, consumption for their products may decline give that the company deals in technology products that become obsolete faster than expected. The market for technical products is experience rapid changes in technology, evolving industry standards, transforming customer needs and frequent new products entry in the market. If NetScout Systems Inc. rapid and development section fail to make timely improvements and innovations successfully, a misstatement in income may occur since the estimated sales will substantially reduce. Besides, the introduction of new products may delay or become unsuccessful. Therefore, the company may meet several unforeseen costs that may easily cause misappropriation. Future NetScout Systems Inc. auditing team should base product performance on their lifecycle in the in the market and verify the Rapid and Development expenses inflation concerning the above fact to prevent misstatement of any kind. (Thibodeu et al., 2015 p 53-145; form 10-K item 1A)
In conclusion, the above inherent factors of NetScout Systems Inc. are just but a few. Large companies such as NetScout Systems Inc. face risk almost at every level of their transactions. Therefore, risk assessment is a process that the company can ignore since many other forms of risks like the control risk, information risks, and auditing risks existing in such a process, and appropriate advice given. Furthermore, misstatements in the income statement are may be an offense if authorities like IRS and SEC get wind of it, and that calls for proper risk assessment.
Thibodeau, J Jay C., et al. Auditing and Assurance Services. 6th. New York: McGraw-Hill Education, 2015.
NetScout Systems Inc. Form 10-K filed with SEC.