False logic isn’t something new. While ‘Fake News’ is the buzzword of the year, false logic has been around since the early days of writing. Hence, the Latin term cum hoc ergo propter hoc, which essentially means “false cause”.
Why is this important? Our credibility as auditors is on the line with every audit report we issue and Management faces the same challenge when writing the Management Discussion and Analysis (MD&A). To destroy someone’s credibility, catch them saying the words “always” or “never.” These absolute statements can be disproved with just one exception. One exception out of a trillion is all it takes to disprove “always”. If you ever want to get someone really mad in a fight, just insert an absolute statement like the word always or never – it’s like throwing gasoline on a fire. Qualifiers are verbiage used to make your point, without getting caught in a lie. Here’s a good table I found that compared absolute and qualified verbiage:
What does any of this have to do with the MD&A? The writer’s credibility is destroyed by false logic statements. It is almost always (notice the qualifier) untruthful, inaccurate, misleading, and just wrong to say, “net position went down because property tax revenue decreased.” The name of the statement or the account we are calling out as the cause isn’t the issue, but rather false reasoning. It only takes one exception to disprove that statement. Said differently, that statement is only accurate if property tax revenue was the only account or if all other accounts combined were less than the total decrease in net position. Most likely, there are hundreds of general ledger accounts going up and down and each of them impacted the net change for the year. Accordingly, make your point, but don’t get caught in false logic – use the simple step of inserting qualifying words like “predominantly, substantially, primarily, mainly, or largely.”
Stepping back from the issue, the purpose of the MD&A is to discuss relevant financial highlights. For the most part, writers are completing the MD&A like robots. If the prior year report called out three changes, the writer will call out three changes this year. If the prior year report called out one change, the writer will call out one change also. Many writers of the MD&A seem to be checking in their minds when completing the MD&A. Authors of the MD&A should try to write a few custom sentences each year that reflect the most significant changes in the entity’s financial operations.