Business risk and risk assessment: Apple Essay

I. The conjunctions Core Business Processes and Strategic ObjectivesThe bon tons products scum bag be shargond out into two main categories, personal computers and related products and portable digital music players and related products. Based on the annual report, the troupe designs, contrives and grocerys (Annual Report 2005 1) m any(prenominal) variations of the products mentioned above. The more(prenominal) popular products of the social club include the macintosh line of desktop and notebook computers, the iPod digital music player, the Xserve G5 server and Xserve RAID storage products, a portfolio of consumer and professional softw atomic number 18 product applications, the Mac OS X operating agreement, the iTunes Music Store, a portfolio of peripherals that moderate and enhance the mack and iPod product lines, and a variety of other service and support offerings (1).Design is mainly a concern of the ships companys look and development. Because the attach to is in the technology manufacture, interrogation and development is a crucial percentage of its operations. It is the manner by which the go with keeps its war-ridden advantage. In its annual report, the phoner admitted that the familiaritys force to compete successfully is heavily dependent upon its ability to ensure a continuing and timely flow of competitive products and technology to the marketplace (14).As a corollary issue to research and development, creation, resistance and acquisition of apt situation rights are also a major concern for the Company. The Company is in possession of some(prenominal) patents and copyrights. On one hand, the Company is concerned with the protection of its patent, copyrights, trademarks and service marks worldwide. In the other, it must protect itself from infringing on others intellectual property rights. The Company does not however rely on its ability to make water intellectual property, it also relies on those owned by third parti es which are acquired with licensing agreements.Because the Company is engaged in producing technology grade after course, the manufacture of the Companys products may create complications. The Company manufactures personal computers and accessories, iPod digital music players and accessories and a variety of consumer and business software applications. The raw materials for these products are sourced elsewhere. at that place are certain distinguish components that are sourced from one or bid outside source (Annual Report 2005 14). In 2005 and 2004, the Company experienced cracks in affinity to one of its products, the PowerPC G5 processors (14). This led to the non-availability of certain Apple products from the market (14). After this incident, the Company announced its intention to shift its Macintosh personal computers from PowerPC G5 and G4 processors to Intel Microprocessors (Apple to use Intel para. 1). This transition is expect to be fully implemented in 2007.The Co mpanys development of new products requires custom made raw materials that are initially single-sourced until the Company determines the ingest to develop new sources (Annual Report 2005 14). The manufacture of raw materials and the assembly of some of the Companys products are made in several(prenominal) exotic countries by third party vendors.The Companys trade is done through the Companys website, confederation-owned retail chime ins, direct selling by the Companys sale force and third party wholesalers, resellers, and value added resellers. The Companys main markets are usually in the following fields education, business, creative and consumer market (Annual Report 2005 12). In 2005, the US education industry accounted for more than 12% of the Companys net sales (12). The Company is not dependent on any single customer for its income. In fact, no single customer of the Company accounted for more than 10% of its sales for three succeeding fiscal years, 2003 to 2005 (12).The Company is divided into four reportable operating segments, America, Europe, Japan, and retail. It also has an operating segment in Asia-Pacific. The three geographical segments mentioned above do not include retail. The Retail segment operates in the United States, Canada, United Kingdom, and Japan. (3)The Company intends to hold on its substantial investment in research and development. The Companys strategical plan includes the avail of the Companys alert products, as well as the development of new ones (7). The Company also believes in the capitalizing in the convergence of digital consumer products (7). This is in keeping with industry trend. For example, both the Company and Microsoft have patents that would advance or create wifi-sharing ability (wireless connectivity) in iPod, iPhone and Zune (Cheng para. 1). Zune, Micosofts digital music player, already has a wireless sharing capability which the iPod hopes to emulate. The new patent of the Company may also make it pos sible for the consumer to directly purchase media from a server through the iPod or iPhone (para 5 and 6).The Company also plans to continue to exploit the perceived advantages of the Companys products. These advantages are innovative industrial design, intuitive ease-of-use, and built-in networking, fine art and multimedia capabilities (Annual Report 2005 2).Another shift in the Companys product development is the shift to a greener apple. The Company announced its intention to continue to remove toxic waste from new products and aggressively recycle old products (Jobs). The Company claims that it is leading the industrys efforts to create more environmentally responsible for(p) company and products. The Company plans to create more energy efficient products in the future (para. 29). The Company is not alone in this. Other companies also exerted efforts to argue social and environmental awareness. Sometime in 2007, Google released a more energy saving black screen after a study showing that a blacks screen uses less electricity than a white one.As far as its marketing is concerned, the Company plans to expand the distribution of its products. In the past year it has focused on adding on to its direct selling capabilities and the improvement of its sales staff. The Company entrust continue this style by building more Company-owned store in amply traffic locations (Annual Report 2005 8). It also aims to widen its consumer base by targeting first-time computer owners and those people who do not own a Macintosh computer (8). The Company also plans to continue building brand awareness by increasing investment in marketing and advertising as shown by the increase in selling expenses everywhere the years.II. Business RisksResearch and development is a major component of the Companys business encounter. It involve a significant amount of the Companys resources, with research and development expenditures amounting to $534million, $489million, and $471million in 2005, 2004, and 2003, respectively (Annual report 2005 13). The benefits are also contingent on several factors, including the ability of the Company to determine which products or innovations can be successfully developed, manufactured and marketed. There is always the endangerment of choosing the wrong innovation to focus resources on. The harm to produce marketable products regularly means loss of resources and market standing.Research and development also has a legal risks involved. The Company has admitted that because of the rapid change in technology and the pace by which new patents are being issued, it is possible certain components of the Companys products and business methods may unknowingly infringe outliveing patents of others (15).Aside from suits relating to infringement of intellectual property rights, the Company is also facing various suits in relation to its products and a derivative suit filed by its shareholders involving inequitable competitor and false a nd misleading proxy statements. In 2006, the Company was placed downstairs scrutiny due to dribble option grants, some of which are issued to the Companys CEO, Steve Jobs, in 1997 and 2001 (Iwata). There were allegations of stockholders that the grant was part of a backdating scheme, a scheme were it is made to appear that the options are transacted at a posterior date when the shares are valued lower (Apple comes under scrutiny).The investigation showed thousands of backdating grants including two made to CEO Jobs, the second of which did not observe the requirements for validity (Iwata). CEO Jobs was not held accountable for the irregularity of the grant. However, because of the irregularity in the stock options grants issued, the Company restated prior years monetary statements. Because of these events, the Company admitted in its annual report (2006) the thither is just risk of litigation, regulatory proceedings and government enforcement actions (21).The manufacturing of t he Companys products raises some special concerns. As stated above certain key components can precisely be obtained from a single or limited source (Annual Report 2005 13). Even key components that are not from a single or limited source are sometimes subject to availability constraints and pricing pressures (13). In facts, sometime in 2005 and 2004, the company already experienced delays in acquiring key components which led the Company to change one of the major components of one of its products. The Company admits that the loss of certain suppliers would have an adverse effect on the Company (14).Because of this, there is a risk that the Company exit not be able to meet demands for the Companys products or that the Company will incur delay in the delivery the products ordered by customers. The Company also relies on third parties to supply digital content in its iTunes stores and to develop certain software applications. The failure of third parties to supply digital content do es not only affect the performance of iTune stores but also the dominant position of the Companys digital music player. In the same manner, the failure of software developers to develop programs compatible with the Companys computer platform due to bigger market for Windows and Linux will adversely affect the demand for the Companys personal computers.The use of foreign third party vendors in the final assembly of the Companys portable products and as suppliers of raw materials increases the Companys risk of being adversely affected by political and economic conditions in these foreign countries. Political upheaval and economic crisis in foreign countries can affect suppliers ability to meet the Companys demand.The Company faces cut throat competition on many of its products. In the advent of personal computers, the Company owns a significant chunk of the market. Over the years, the Companys market share grew littler and littlerer. In July 2006, the Companys market share is around 2.2% (Apple market share myth), a significant drop from its original market share. However, percentage figures do not account for the growth in the PC market since its birth in the 1980s. The decline in the Companys market share can also be attributed to the growth of numerous generic brands that are much cheaper than the Companys Mac computers. The proliferation of clones led many companies to lower their prices and profit permissiveness to gain a bigger market share.There is an on going price competition in the PC market, and the Company is striving to be competitive in this area. However, the Companys business strategy seems to focus less in making cheaper PCs but more on developing products that appeal to its break market, such as the creative market (Annual Report 2005 2). This strategy of the Company is a business risk because the limited market base makes it more threatened to economic factors. Decline in spending ability of one of its niche market can have a greater impac t on the company than if it has diverse market. On the other hand, it removes the Company from the competition in market segments that are already saturated with other players.Some analysts believe that part of the height of the Companys strategy is that it has refused to compete in a market over which Microsoft already has a monopoly (Apple market share myth). Microsoft has acquired a monopoly in the industry by selling cheap PCs with expensive software or a system called exclusive software bundling. This makes it difficult for other companies to develop operating systems that are competitive with Microsofts. The Companys strategy in focusing on the improvement of what the consumers perceived as the functional and design advantages of the Macintosh platform opens the Company to the risk mentioned above but it also removes it from the competing in saturated markets.The digital music player market is expected to grow up to 286 million units in 2010 (Guza para.1). The Companys own pr oduct, iPod, continues to dominate the market however, many competitors are cropping up, challenging the Companys dominant position. Analyst believes that the Company should not be complacent regarding its dominant position in the business since the digital music player market is young and has only penetrated a small portion of the market in the United States (Siklos). Although many competitors have tried to challenge the Companies and failed, the competition is not giving up. Competitor, Microsoft, came up with Zune, its own brand of digital music player that is compatible with Microsofts own on-line music store. Samsung, Sandisk and Creative have came out with products of their own. Software, hardware and on-line companies are working in concert to mete out technical difficulties in the initial launch of their own digital music players, and improving their services (Wingfield para. 4). There is a risk that the Companys music related products may follow the road of its personal co mputers.III. Three Most Significant Financial Statement AccountsThe three most significant financial statement accounts for the Company are research and development, stock, and common stock.Research and development is significant because the Company is engaged in the production and marketing of technology. Not only is research and development expense significantly higher compared to other industry, it is also the cost which enables the Company to continue its existence. In the industry where the Company belongs, obsolescence happens very fast. If the Company fails to innovate, there will come a time that the Company itself will be obsolete since the consumers have switched to the more recently developed products. Many of the Companys strategic plans are tied up with research and development, such as the plans to improve existing products and the move towards convergence of digital products.The plans of the company to improve and to add innovations to existing products will involve a significant amount of the Companys resources. The amount of the companys resources spent in research and development are expensed directly, except for the costs which are incurred after the innovation has been determined to be technologically feasible (Annual Report 2005 68).The failure of the Company to produce technologically feasible products may increase research and development expense, in the same manner that the success of developing technologically feasible products does not unavoidably decrease research and development expense. If all the cost for development of the product was incurred before it was determined to be technologically feasible, all cost are expensed outright regardless of feasibility. Based on the Companys financial statements, capitalization of research and development expense is minimal (77).Inventory is significant for the Company since its operations involved both manufacturing and retail. The Companys inventory is subject to several business risks al ready discussed above. In relation to the supplies issue, the Company entered into long-term supply agreements with several companies which bound the Company to these suppliers until 2010. As part of the agreement, the Company is required to make prepayment amounting to $1.25 billion in the second quarter of 2006. (Annual Report 2005 91)Part of the Companys objectives is to ensure a continuing and timely flow of competitive products and technology to the marketplace. The achievement of this objectives means that the Companys inventory levels are always enough to meet demands for the Companys products. This would also mean that the Company has successfully managed it inventory during the year. Proper anxiety of inventory would result in a year end inventory level is not too high or to low.The Companys common stock is significant for the year 2006 because of the discovered irregularities in the issuance of stock option grants issued in 1997 and 2001. These resulted in allegations of fraud and falsification of documents (Wearden para.4). The Company has already investigated the matter, and the result of such investigation has exonerated CEO Steve Jobs of any misconduct. However, restatements of prior years financial statements were made, including the common stock and other related accounts (para. 3). This account is not necessarily affected by the Companys strategic objectives. The stock option grant issue itself affected the performance of the Companys stock in the market and even raised the issue of possibly delisting from NASDAQ, but which turned out be without bases.IV. Management AssertionsThe counseling self-confidences germane(predicate) to research and development expense are completeness, accuracy, cut-off and classification. Completeness is a relevant management assertion because research and development is an expense account, and so, there is a risk that the Company will not include all research and development cost incurred in order to increase the net income for the year. Accuracy is relevant because there is a risk that transactions relating to this account are not recorded properly, resulting in under or over statement of the expense account and, in effect, of net income for the fiscal year.Cut-off is relevant for research and development so that there is proper twinned of the expense with the revenue earned during the fiscal year. Failure to record expense in the correct accounting period can also result to over or under statement of the net income for the year. Classification is also a relevant for research and development because there is a risk that the Company will capitalize research and development improperly resulting in the over statement of net income for the year and inflating the Companys asset even if there are no expected future benefits. Failure to record the amount in the proper account can also mean that there is no twinned of income and expense.The management assertions relevant to inventory are exi stence, valuation and rights. Existence is a relevant management assertion because there is a risk that the Company will record assets that are not there in order to make the financial conditions of the Company look better to investors. The recording of assets that do not exist can also mean failure to record expenses which, in effect, results to overstatement of net income. Valuation is also a relevant because there is a risk that the Company may overstate the value of the asset to improve the financial statement of the Company. In either management assertions, there is a risk of management inflating the asset of the Company usually to improve the stockholders equity of the Company. Management assertions as to rights over inventory is also relevant because there is a risk that the Company included in its assets, inventories whose ownership has already passed to another, to improve the financial statements of the Company.The management assertions relevant to common stock are existen ce and valuation. Existence is a relevant management assertion because there is a risk that the Company records stocks which are not in reality subscribed and issued or issues stock for which no consideration was actually received by the Company, also called watered stocks. Valuation is also relevant because there is a risk that the Company will over value the property received in consideration for the stocks issued, particularly if the stock is issued for consideration other than cash, making it appear that the Company is better off than it actually is. Both management assertions can be used by the Company to lure investors to invest in the Company under false pretenses.Although wrong management assertions can be a result of other causes that are not deliberate on the part of management, such as mistakes. The assertions mentioned above are relevant to those accounts because there is the special risk of deliberate misstatement on the part of management.V. Environmental RisksThere is a low inherent, control and detection risk in management assertions of completeness and accuracy of the research and development expense based on the Companys conservative approach in recording research and development, as well as, the relative rest of identifying and recording research and development expense.On the other hand, the management assertion relating to the cut-off of research and development expense is assessed as having high inherent, control and detection risk because of the lack of sufficient data regarding the Companies processes and controls relating to this account. Because the risks mentioned above are assessed at maximum, more substantial test shall be performed to decrease audit risk.There is a high inherent risk in the classification of research and development expense because of the difficulty of determining technological feasibility. The mark of Technological feasibility can be extremely subjective. On the other hand, there is low control and detection risk in the classification of research and development expense because based on the Companys past practices, the Company is very conservative in capitalizing research and development expenses. The percentage of research and development expense capitalized by the Company is very small compared to the research and development expense incurred every year. It is the Companys policy to record all development cost incurred before determination of technological feasibility as expense, and the determination of technological feasibility is usually done after a large portion of the cost of development has been incurred so that only a small portion of the cost is actually capitalized and amortized.The inherent, control and detection risk is high for all assertions related to inventory because the operations of the Company is complex and international. The final assemblies of some of the Companys products which are performed by the Company itself are in different locations outside the United St ates. There are also final assemblies of the Company products that are performed by third parties in different countries in Asia. The Company also takes advantage of several ways of marketing its products. It uses company-owned stores, direct selling, third party sellers and on-line selling. These make it extremely difficult to keep track of the movement of the inventory and to determine when ownership over the inventory change hands.The inherent risk is assessed as high for the management assertion of existence and valuation of common stock. This is because of the investigation which the Company itself initiated in relation to its stock options grant. The investigation caused the Company to adjust its income from prior years amounting to $84 million. The Company also has stock-based compensation plans consisting of stock options grants and stock purchase plans (Annual Report 2005 88) which calls for complicated computations. The control and detection risk is assessed as low for the management assertion of existence and valuation of common stock because of the Companys efforts to investigate the matter as soon as the problem arose. It was the Company itself that announced the existence of irregularities in the issuance of its stock options grant. The Company has put in placed control mechanisms to address the matter. Moreover, records of the investigation conducted can help the auditor minimize detection risk.