Understanding the Importance of Depreciation in Corporate finance: A Cautionary Tale

Recently, our organization welcomed a new finance Director, whose impressive background includes over two decades in corporate finance, a Big 4 firm experience, and an MBA from a prestigious institution. As a senior accountant reporting directly to her, I expected to leverage her expertise to enhance our financial operations. However, I’ve been taken aback by her fundamental misunderstanding of some key Accounting principles.

During a walkthrough of our monthly closing procedures, she innocently inquired about the rationale behind our monthly depreciation expenses, expressing confusion over why we seem to be “wasting money” on something that doesn’t involve actual cash outlay. Initially, I assumed she was challenging me as part of her onboarding process. I promptly clarified that depreciation is a method of allocating the cost of tangible assets over their useful life, thus matching expenses with revenue generated from these assets over time. Her response was one of bewilderment, as she questioned why we were expensing equipment we had already purchased.

When I referenced Generally Accepted Accounting Principles (GAAP) and proceeded to demonstrate the journal entries involved, her request for a simplified, step-by-step breakdown felt disheartening. Here was someone in a senior finance role struggling with concepts typically covered in an introductory Accounting course.

The situation became even more perplexing when she suggested that we could record a new $50,000 server as an expense to take advantage of a tax write-off in the current year rather than allocating its cost over multiple years. I explained the importance of capitalization thresholds and the distinction between assets and expenses, yet she proposed consulting with our tax specialist as her confusion lingered.

What left me truly alarmed was that she is responsible for reviewing our financial statements for accuracy before they are presented to the board next week. This raises serious concerns about our financial oversight.

For additional context, our company operates in the manufacturing sector with annual revenues of $15 million—far from the confines of a small startup where one might expect limited accounting expertise.

Furthermore, she expressed genuine surprise when I explained why our cash flow statement didn’t align with the profit and loss statement, failing to grasp that net income and cash flow are separate measures.

As I reflect on this experience, I’m left questioning how a professional with such an extensive finance background could lack a grasp of these foundational concepts. It raises troubling questions about either her previous roles, which may not have demanded rigorous accounting skills, or the potential inflation of her qualifications on paper