A Dilemma in the finance Department: When Experience Doesn’t Translate to Understanding

Recently, our firm welcomed a new finance Director, a move that initially brought optimism given her extensive background. Boasting over 20 years in corporate finance, a prestigious Big 4 pedigree, and a respected MBA, one might expect her to seamlessly integrate into our Accounting practices. However, after just a few weeks, I find myself grappling with unexpected challenges in basic financial principles.

As the senior accountant reporting directly to her, I was in the midst of guiding her through our monthly closing process when a startling question arose: “Why do we incur monthly depreciation expenses that seem like a waste of money since we aren’t actually spending anything?” At first, I thought this was a test of my knowledge. However, her serious demeanor indicated otherwise.

I took the time to explain that depreciation is a vital Accounting principle that allocates the cost of tangible assets over their useful lives. This is a fundamental concept intended to synchronize expenses with the revenue generated by those assets during their lifespan. Yet, she appeared puzzled and inquired, “But we’ve already paid for the equipment. Why do we need to expense it again?”

Even after I referenced Generally Accepted Accounting Principles (GAAP) and presented the journal entries related to depreciation, her confusion persisted. She requested a breakdown of the process, labeling it “unnecessarily complicated.” In an attempt to clarify her understanding, I dedicated a half hour to demystifying concepts usually covered in introductory accounting courses.

Things escalated when she proposed that we could expense our newly acquired $50,000 server to take advantage of a tax write-off this year rather than amortizing the cost. When I mentioned the importance of capitalization thresholds and the distinction between an asset and an expense, her reaction was to suggest consulting with our tax advisor, as she felt the process wasn’t quite right.

To top it all off, she is currently tasked with reviewing our financial statements for their accuracy before they are presented to the board next week.

For context, it’s important to note that we are a well-established manufacturing company with annual revenues of $15 million, not a small startup that might operate with less formal accounting oversight.

In addition to these issues, she expressed confusion regarding our cash flow statement, commenting that it “doesn’t match the Profit and Loss statement.” Explaining that net income is not equivalent to cash flow seemed to leave her even more bewildered.

As I reflect on these discussions, I can’t help