Inherent Risk

The phrase “inherent risk” basically translates to, “FYI, there might be something wrong here.” It doesn’t mean there is something wrong, but it means there might be. And when we say “wrong,” we don’t necessarily mean that someone did something intentionally bad...we might just mean that there are possible mistakes in our information, or that we’re making decisions based on things we aren’t certain about.

Two quick examples:

On the one hand, as mentioned, “inherent risk” might refer to the probability that mistakes were made calculating and/or reporting complex business transactions. There are a ton of regulations in certain industries, especially those related to finance, and there’s always a chance that a small step or piece of the puzzle was overlooked when a company’s information was compiled or reported. When those businesses or business processes are audited, it’s the auditor’s responsibility to specifically look for and assess inherent risk, and possibly offer solutions to reduce its likelihood or mitigate its effects.

On the other hand, “inherent risk” can simply mean that we’re making predictions based on things that are...unknowable. If our traveling circus company is about to expand operations into a new country, we can release all sorts of studies and estimates and financial statements showing how awesome and profitable this venture might be, but we can’t know 100% how it’s going to turn out until we do it. In other words, our venture has some inherent risk: things might happen that cause financial loss, but we don’t know for sure what those things might be, or how much financial loss they might entail.