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Five Types of Reasoning

By Leita Hart-Fanta, CPA

April 6, 2010

We in auditing are endeavoring to find the truth about a certain matter, but we are often confronted with clients who see things differently. And if we are willing to believe that someone else might be smarter than us—and many auditors are not!—we might see validity in their response to our findings.

Some of the conflict may arise because we are using a different type of thinking than our client. I found out recently that what passes for "truth" has evolved over time. Philosophers have given names to the various types of thinking, and we will cover those five types here.

To keep unnecessary conflict to a minimum, we should first be conscious of what kind of reasoning we are using to make our conclusions. And then we should endeavor to find out what sort of reasoning the client is using. As Pontius Pilate said to Jesus, “What is Truth?” It turns out that truth is very difficult to pin down.

At least five types of thinking

1. The first formally recognized method of thinking through a problem was called “rationalism.” In rationalism, if you can imagine it, it can exist. For example, clothes on any given group of people will range in color and a good number of people will be wearing red. You can rationalize that because there are so many variations on red, there has to be a “master” or “perfect” red in existence. You can see the limits of this way of thinking. Just because you can guess something should be there does not mean it is there.
2. Then came empirical reasoning. In empirical thinking, you begin with a hypothesis and then you gather evidence or experiment to support your hypothesis. This is the most common method used by scientists in their work. There is a limit to this kind of thinking also, as your hypothesis might be flawed or your experimentation method might be limited. For instance, cancer researchers are working to prove a handful of hypotheses—some of them being that cancer is a virus and some of them being that cancer is genetic. Both hypotheses have supporting evidence.
3. Then you have existential reasoning. This type of reasoning says that my version of the truth will be different than your version of the truth because we see reality through different lenses or experiences. Therefore, all truth is relative. In essence, existential reasoning says, “My version of the truth is as good as yours.”
4. Ethical reasoning asks that you determine what you value most and then weigh decisions based on what you value. If you value human life above justice, then the death penalty is wrong. If you value justice above human life, then the death penalty is acceptable.
5. And then the last form of reasoning is revealed reasoning, or reasoning based on trust and faith. Because you trust or believe in the source of the information, you believe in what the source says. This is the kind of reasoning necessary to believe religious truths. This is also the sort of reasoning we rely upon when we listen to the opinions of a political pundit on cable news. If Rachel Maddow or Rush Limbaugh speak it, it must be true… we trust them, right?

What type of thinking do auditors use?
What kind of reasoning do auditors use? Every sort of reasoning, and if we are crafty we will use several sources at once. The more types we can pull from, the more convincing our conclusions will be.

One of the most important things we can do as auditors is maintain our credibility. The Yellow Book says:

3.03 Auditors and audit organizations must maintain independence so that their opinions, findings, conclusions, judgments, and recommendations will be impartial and viewed as impartial by objective third parties with knowledge of the relevant information. Auditors should avoid situations that could lead objective third parties with knowledge of the relevant information to conclude that the auditors are not able to maintain independence and thus are not capable of exercising objective and impartial judgment on all issues associated with conducting the audit and reporting on the work.

So we lose our ability to persuade and convince others when we lose our credibility. This is a bit of revealed truth, right? One of the best things we can do to be convincing is to base our findings on criteria established by an authority that the client will also see as an authority.

Then, we do our best to rationally show that a problem was caused by a particular breakdown in controls and another or more effective control is needed. For instance, if the entity would ensure that a supervisor reviews the cash reconciliations, it will make sure they get done. That is just common sense, right? Well, that control may not take care of the whole problem. And too bad common sense isn’t that common.

If we want to prove that the cash reconciliations are not being done, we start with the hypothesis that cash reconciliations are not done. Then we might gather evidence by sampling a few months out of the year to prove empirically that we are right.

Yes, the finding is going to possibly hurt the tentative career of the accounting manager, but we value accuracy and financial resources above human cost, so we are using ethical reasoning.

And although from management’s point of view, the account that only has 45 transactions a month is not worth the staff’s time to reconcile, it turned up as material in your risk assessment. Therefore, you have deemed this issue a material weakness in the audit report. A bit of existential reasoning involved there.

The most convincing—argument free—conclusions that we make use several types of reasoning to convince the client that what we say is true. We get less kickback when we sew together or sync up a few types of reasoning and we feel the truth in our gut and convince the client to feel the truth in their gut.

Yesterday, a reader wrote to me and asked me if she should deem the fact that a school district had not filed its quarterly payroll reports to the IRS on time for the past four years a "significant deficiency" as defined by AICPA standards. She feared that the IRS would penalize the district in arrears and found that no one at the district was reviewing the reports. She asked me my opinion, and I told her that it sounded like a reasonable conclusion to me. Will the client disagree with her? Probably. Are they both right? Yeah. What is truth? I can see it going either way.

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Leita Hart-Fanta, CPA, CGFM
Resides in Austin, Texas and can be reached at www.auditskills.com.

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