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What is an Inherent Risk?

 , April 11, 2017 updated on December 29, 2022
Inherent risk is the potential that a firm has a material misstatement in its financial statements. This is a financial auditing term that refers to errors, omissions or fraud in accounting. It is difficult for outsiders to assess inherent risk. Individual investors depend on a firm's independent auditors to reduce inherent risk by confirming facts and judgements in a firm's accounting.

Example

An investor purchases a stock because she is impressed by recent earnings and the firm's lack of debt. It is later revealed that the firm has massive and unsustainable debt loads hidden in various subsidiaries that is backed by the firm's assets. The stock collapses in price on the news.
Overview: Inherent Risk
TypeFinancial Risk
DefinitionThe potential that a firm has a material misstatement in its financial statements.
Related ConceptsFinancial Risk
Investing Risk
Bankability
Concentration Risk

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