The Curious Case of a finance Director’s Fundamental Misunderstanding

Recently, our organization welcomed a new finance Director with more than 20 years of experience in corporate finance, including a notable Big 4 background and an MBA from a prestigious institution. With such a robust resume, expectations were high. However, a recent encounter left me both baffled and concerned about her foundational knowledge of basic Accounting principles.

Approximately six weeks into her tenure, I had the opportunity to guide her through our monthly close process. It was during this session that she posed an unexpected question: “Why do we incur depreciation expenses every month when we aren’t actually spending any money?” Initially, I suspected she might be testing my understanding. However, as I began to explain the concept of depreciation—its role in allocating the cost of assets over their useful lives to match expenses with the revenue generated—I realized we were in uncharted territory.

Her response was one of confusion. “But we’ve already paid for the equipment. Why are we expensing it again?” At this point, I recognized the need to clarify some basic Accounting principles that one would expect anyone in her position to grasp. I even referenced Generally Accepted Accounting Principles (GAAP) and offered a detailed walkthrough of the journal entries involved. To my astonishment, she requested a more simplified explanation, remarking that the process seemed needlessly complex.

As if that wasn’t enough, she questioned why we couldn’t simply write off our new $50,000 server in its entirety this fiscal year, expressing disbelief at the notion of capitalization thresholds. I attempted to explain the distinction between assets and expenses, but she suggested that we consult with our tax advisor, as her intuition suggested something wasn’t quite right.

To add to the perplexity, she had previously inquired why our cash flow statement didn’t align with the Profit and Loss (P&L) statement. This further demonstrated her misunderstanding, as she visibly grappled with the fact that net income differs from cash flow.

It’s difficult to comprehend how someone can remain active in finance for two decades without mastering these essential concepts. It raises critical questions: Has she merely glided along in positions where others handled the intricate details? Is this a case of inflated qualifications?

In our industry—a $15 million revenue manufacturing company—such fundamental knowledge is not only expected but essential for effective financial stewardship. As she prepares to review our financial statements before they are presented to the board next week, my concern grows. How can we