A Surprising Gap in Financial Fundamentals: Navigating Challenges with a New finance Director

Recently, our organization welcomed a new finance Director with a seemingly impressive background—over two decades of experience in corporate finance, a robust history with a Big 4 Accounting firm, and an MBA from a well-regarded institution. However, what has transpired over the last several weeks has raised significant concerns about her grasp of fundamental financial principles.

As a senior accountant who reports directly to her, I’ve had the opportunity to guide her through our monthly closing processes. In a recent meeting, she posed a question that left me both puzzled and concerned: she inquired why we incur depreciation expenses every month when there’s no cash outflow associated with them. Initially, I thought she was conducting a test to gauge my expertise.

I patiently explained the concept of depreciation—how it allows us to spread the cost of our assets over their useful lives, aligning expenses with the periods that utilize those assets. Yet, her response was a blank stare, accompanied by the remark, “But we already paid for the equipment. Why are we expensing it again?”

In an effort to clarify, I referred to the Generally Accepted Accounting Principles (GAAP) and walked her through the journal entries pertaining to depreciation. To my astonishment, she requested a detailed, step-by-step explanation, remarking that the process seemed unnecessarily complicated. This was a topic typically covered in introductory Accounting courses, which made the situation all the more perplexing.

The conversation took another turn when she questioned why we couldn’t simply expense a newly purchased $50,000 server immediately to benefit from a tax write-off for the current year instead of amortizing the cost over time. I explained the necessity of understanding capitalization thresholds and the distinctions between assets and expenses. However, she suggested we consult the tax advisor because she believed there must be an error in our approach.

What adds to my disbelief is that this Finance Director is expected to review our financial statements for accuracy before they are submitted to the board next week. Our company, which generates $15 million in revenue and operates within the manufacturing sector, is not a small startup where basic accounting practices might be overlooked.

Moreover, she expressed confusion about why our cash flow statement didn’t align with the profit and loss statement. When I clarified that net income and cash flow are distinct metrics, her bewilderment was evident.

Given her extensive experience, I am left questioning how she navigated two decades in finance