Understanding the Fundamentals: A finance Director’s Troubling Misconceptions

Recently, our organization welcomed a new finance Director, an individual with over two decades of experience in corporate finance, a background with a Big Four firm, and an MBA from a well-regarded institution. On paper, her credentials were impressive. However, in practice, I’ve found myself increasingly concerned about her grasp of basic financial principles, which became apparent during a routine discussion about our monthly closing process.

During our review, she posed an unexpected question: “Why do we incur depreciation expenses each month if we aren’t actually spending any money?” Initially, I thought she was playing a trick on me. After all, depreciation is a fundamental concept in Accounting that helps allocate the cost of an asset over its useful life, aligning expenditures with the Accounting periods that benefit from that asset.

Despite my explanation, which covered the core principles of depreciation, she appeared puzzled. “But we’ve already paid for the equipment,” she remarked. “Why are we expensing it again?” I was astounded. I briefly outlined the norms of Generally Accepted Accounting Principles (GAAP) and showed her the related journal entries, only to receive a request for a breakdown of the process. The look of confusion on her face suggested she found these standard practices overly complicated.

The conversation took another bewildering turn when she inquired about the possibility of expensing our new $50,000 server entirely in the current year to maximize our tax deductions, rather than spreading the expense over time as required. When I elucidated the concepts of capitalization thresholds alongside the distinctions between assets and expenses, she countered with a suggestion to consult our tax advisor, reflecting her skepticism about the explanations I provided.

To add to my concern, this Finance Director is tasked with reviewing our financial statements for accuracy before they are presented to our board next week. The stakes are high, and her understanding, or lack thereof, of these essential financial concepts is alarming.

As a point of reference, my company operates in the manufacturing sector, generating $15 million in revenue. This is not a nascent startup where one could easily overlook fundamental accounting practices.

Moreover, during the same discussion, she expressed bewilderment as to why our cash flow statement did not align perfectly with the Profit and Loss (P&L) statement. When I clarified the distinction between net income and cash flow, she seemed genuinely perplexed.

This experience has left me questioning how someone with her extensive background could navigate 20 years in