Inherent Risks in Accounting

In accounting, inherent risk refers to the risk that arises because of an omission or an error in the financial statements as a result of a factor that the organisation is unable to control apart from the failure of internal control (Also see How Does Internal Control Help in Overcoming Payroll Fraud?). There are several types of inherent risk, which include the risks arising from manual intervention, the conspiracy among the employees, the complexity of business transactions and organisational structure.

The first inherent risk that we will look at is the risk arising from manual intervention. Without a doubt, the errors (Also see Type of Common Accounting Errors) or mistakes that humans have made will cause problems in the processing of business transactions. As humans still manage some of the tasks, this risk will always exist. As an instance, the employees may miss out an invoice accidentally when recording purchases, record the same transaction for a few times, or record the transaction with an incorrect amount.

Besides, the conspiracy among the employees is one of the inherent risks that business owners should not ignore or underestimate. If the employees conspire with each other with bad intentions, the probability of control lapse will get higher. As a result, errors, misstatements and frauds may happen in the financial statements (Also see Who Needs the Financial Statements?). Hence, business owners should implement segregation of duties in their organisations and separate the tasks among stakeholders and employees. This is one of the internal controls that helps to minimise inherent risks.

Sometimes, the accounting transactions can be quite complicated and thus, business owners are unable to record or report them quickly and accurately. This is one of the inherent risks, too, as complicated business transactions often lead to errors and mistakes. To solve this problem, business owners should consider hiring an in-house accountant or an accounting firm in Johor Bahru to ensure that the books of accounts are always up to date under applicable accounting frameworks.

Also, if the organisational structure of the company is very complicated, the inherent risks they face will be higher too. Some of the companies may have many holding companies, subsidiaries or joint ventures. For companies like this, the process of recording business transactions between them can be confusing and hard to understand.