Navigating the Challenges of New Leadership: A finance Director’s Surprising Gaps in Knowledge

Introduction

In the ever-evolving landscape of corporate finance, qualified leadership is essential. Recently, our company welcomed a new finance Director with an impressive background—over 20 years of experience, a Big 4 pedigree, and an MBA from a prestigious institution. However, as a senior accountant reporting directly to her, I’ve uncovered some unexpected gaps in her financial knowledge that have left me both puzzled and concerned.

The Depreciation Dilemma

About six weeks into her tenure, during a routine walkthrough of our monthly close process, she posed a question that struck me as almost incredulous. She wanted to know why we incurred what she termed “wasted expenses” on depreciation each month, despite the fact that these costs seemed to them as already paid off. My initial reaction was to assume she was joking.

I took the time to explain that depreciation is a critical Accounting principle that allocates the cost of tangible assets over their useful lives. This practice aligns expenses with the benefits those assets provide during specific Accounting periods. To my surprise, her response was a blank stare followed by, “But we already bought the equipment, so why are we expensing it again?” It was at that moment I realized she wasn’t testing my knowledge; she genuinely didn’t understand a foundational concept.

Addressing Basic Principles

After clarifying the basic principles of GAAP (Generally Accepted Accounting Principles) and illustrating the corresponding journal entries, she requested a step-by-step unpacking of the concept, stating it seemed overly complex. I spent the next 30 minutes elaborating on what many would consider basic accounting principles, only to find her still perplexed.

Our discussion took another turn when she questioned why we couldn’t simply book the expense of a new $50,000 server in full for this tax year to maximize our write-offs. When I introduced the ideas of capitalization thresholds and the distinction between an asset and an expense, she suggested that we consult with our tax advisor, expressing disbelief at the logic behind these accounting practices.

Confusion Over Cash Flow

The situation culminated when she voiced confusion over the discrepancies between our cash flow statement and profit and loss (P&L) reports. “Why don’t these match?” she asked, clearly struggling with the basic understanding that net income does not equate to cash flow.

Conclusion

As we approach an important review of our financial statements set for