An Unexpected Challenge: Questioning the Basics of Depreciation in finance Leadership

Recently, our organization welcomed a new finance Director, a move that initially filled our team with optimism given her impressive credentials. With over 20 years in corporate finance, a background with a well-known Big 4 firm, and an MBA from a prestigious institution, her expertise seemed unquestionable.

However, an encounter during our monthly close process raised eyebrows regarding her foundational understanding of key Accounting principles. As I guided her through our procedures, she posed a bewildering question: “Why are we throwing money away each month on depreciation expenses when we haven’t actually spent anything?”

At first, I assumed she was playing devil’s advocate, testing my knowledge. I explained that depreciation is a critical Accounting practice that spreads the cost of an asset over its useful life, ensuring that expenses align with the revenue generated from these assets. To my surprise, her expression remained blank, and she retorted, “We already paid for the equipment. Why are we expensing it again?”

In an effort to clarify, I referenced Generally Accepted Accounting Principles (GAAP) and walked her through the relevant journal entries. After half an hour, her confusion persisted. She even inquired why we couldn’t simply expense a new $50,000 server immediately to maximize our tax write-off instead of deferring it. I explained the reasoning behind capitalization thresholds and the distinction between assets and expenses, yet she suggested we should consult with our tax advisor because she found the concept puzzling.

What truly startled me was the impending deadline—she is tasked with reviewing our financial statements for accuracy before presenting them to the board next week.

To provide some context, our organization operates within the manufacturing sector, generating around $15 million in revenue. We aren’t a small startup; our accounting practices must adhere to well-defined standards.

Moreover, during our discussions, she raised another concerning question about our cash flow statement not aligning with the profit and loss (P&L) statement. She genuinely appeared mystified when I clarified that net income does not equate to cash flow.

This entire situation has left me questioning how someone with her years of experience could lack such a grasp of these fundamental accounting concepts. It suggests either a history of roles where deeper financial analysis was not required or, perhaps, some embellishment in her resume.

As we navigate these challenges ahead, the necessity for a solid foundation in accounting cannot be overlooked, especially in leadership positions. It is essential