Organizations are surrounded by risks, and with today’s operations spanning multiple countries and regions, there will always be inherent risks. However, these risks are often in their rawest form, making them the most difficult to reduce or control. Organizations are better equipped and perform more effectively when they have a comprehensive understanding of inherent risk, enabling them to better prepare for changing market dynamics. This preparedness allows them to stay ahead, gain a strategic advantage, and increase operational resilience. Inherent risk is almost always a risk that has been neglected and has resulted in problems, and it is characterized based on the degree of risk and any risk controls or mitigating measures.
When discussing risk assessment and management, inherent risk refers to the level of risk that affects an activity, process, or organization when no internal controls or risk mitigation are in place. Understanding inherent risk and how to address prospective risks is crucial for auditors, risk managers, and decision-makers. In simple terms, inherent risk refers to your organization’s current risk exposure in the absence of any controls.
Factors That Affect Inherent Risk
Business operations are influenced by the type of activities they perform, the industry in which they operate, and whether they are involved in a high-risk business. For example, a company that manufactures weapons may be more prone to accidents and therefore face higher inherent risks compared to a local convenience store.
With more organizations using technology and relying heavily on data to fuel their operations, the security of this data has become increasingly sensitive and personal, necessitating protection against breaches or cyber-attacks. This is particularly true for companies that rely heavily on online operations.
Organizations are also more vulnerable when there is a higher level of complexity within the organization, meaning more processes and a greater chance of error, which can lead to process and system failures.
Finally, as complexity increases, various procedures may involve personnel who are not adequately trained or simply not a good fit for the task. This can lead to inefficiency and, eventually, unethical management.
The Difference Between Inherent and Residual Risk
Inherent risk is often addressed alongside residual risk. Any mitigation action or controls that are part of a company’s operations and help decrease inherent risk become residual risk once control measures are implemented. Residual risks can be measured against the organization’s risk tolerance and thresholds, providing valuable information about overall risk exposure.
Assessing Inherent Risk
To quantify inherent risk, two key criteria are considered: impact and likelihood. If the risk materializes, it must be measured on a scale from minimal to excessive. The likelihood of the risk occurring is higher when no controls are in place. To determine the overall inherent risk, both impact and likelihood are taken into account. Inherent risk also serves as a metric for auditing and compliance, and organizations can use this information to allocate risk management resources effectively.
SignalX can assist organizations in managing inherent risk by offering real-time risk assessments, predictive analytics, and continuous monitoring. Inherent risks are difficult to identify, and in larger business organizations, where transactions are often subject to approximation, the potential for failure is higher. SignalX’s AI-powered insights improve operational resilience, ensure compliance, and enable proactive risk management. By estimating both inherent and residual risks, SignalX helps companies reduce risks and remain prepared in a changing environment.
