Idiosyncratic Risk: A Financial Accounting Perspective to Control Unsystematic Risk

Idiosyncratic risk, also known as unsystematic risk, refers to firm-specific volatility that is not correlated with overall market movements. Traditional finance assumes this type of risk can be diversified away; however, empirical research shows that inadequate financial accounting practices can exacerbate such risks, especially in emerging economies and public sector organizations. This paper explores how financial accounting mechanisms through transparency, timely disclosures, internal controls, and accrual quality can help mitigate idiosyncratic risk. By examining literature from accounting theory and risk management, the study establishes a framework that links accounting quality to firm-specific volatility and provides recommendations for risk governance through financial reporting.