A New finance Director’s Surprising Lack of Fundamental Knowledge
In our ever-evolving financial landscape, it’s crucial for leadership to possess a solid understanding of fundamental Accounting principles. Recently, I encountered a startling situation that underscored this necessity.
About six weeks ago, our company welcomed a new finance Director to the team. With over two decades of experience in corporate finance, a prestigious background with a Big 4 Accounting firm, and an MBA from a well-respected institution, her resume appeared impressive at first glance. However, what transpired during a routine meeting left me both puzzled and concerned.
As part of the monthly close process, I was guiding her through our financial practices when she posed a perplexing question: Why do we incur monthly depreciation expenses for equipment that has already been purchased? Initially, I assumed she was testing my knowledge. I proceeded to explain that depreciation is a method used to allocate the cost of physical assets over their useful lives, ensuring that the expenses align with the revenue generated during those periods. Yet, her response was bewildering; she didn’t seem to grasp the concept that we account for assets over time rather than expensing them all at once.
When I referred to Generally Accepted Accounting Principles (GAAP) and attempted to illustrate the related journal entries, she requested a step-by-step breakdown, expressing that the process felt overly complex. For context, I spent half an hour explaining material that is typically covered in an introductory accounting course.
The conversation took another unexpected turn when she questioned why we couldn’t expense a new $50,000 server immediately to maximize our tax write-off for the current year instead of spreading it out over several years. I elaborated on capitalization thresholds and the distinction between an asset and an expense, yet she suggested liaising with our tax advisor because her understanding of the matter seemed fundamentally misaligned.
Perhaps the most concerning aspect is that she is responsible for reviewing our financial statements for accuracy before they are presented to the board next week. This is particularly alarming given that we are a well-established manufacturing company generating $15 million in revenue—not a small startup with limited accounting experience.
Additionally, during our conversation, she expressed confusion regarding our cash flow statement not aligning with the profit and loss statement. When I clarified that net income does not equal cash flow, it became evident that there was a significant gap in her understanding of basic financial concepts.
This experience has left me questioning how an individual can navigate the finance sector for two decades without a grasp of foundational principles.
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