When a finance Director Overlooks the Fundamentals: A Reckoning in Accounting
Recently, our company welcomed a new finance Director whose impressive credentials include over 20 years in corporate finance, a background at a prestigious Big 4 firm, and a well-respected MBA. However, my interactions with her during the monthly close process have left me feeling perplexed.
During a routine walk-through of our financial operations, she posed a question that caught me off guard: “Why do we incur depreciation expenses monthly if we aren’t actually spending any money?” Initially, I assumed it was a test of my knowledge, but as I delved into the explanation of how depreciation works—allocating the cost of assets over their useful lives to align expenses with the revenues they help generate—I was met with a blank stare.
Despite my efforts to clarify that this practice is fundamental to generally accepted Accounting principles (GAAP), she remained unconvinced, inquiring, “But we already paid for the equipment. Why do we need to record it as an expense again?” This led me to explain the intricacies of the associated journal entries, resulting in a half-hour discussion about concepts that are typically introduced in introductory Accounting courses.
Further complicating matters, she questioned the rationale behind not expensing a new $50,000 server immediately for a tax deduction this year instead of allocating it over time. When I introduced the notions of capitalization thresholds and asset versus expense classifications, she suggested we seek counsel from our tax advisor, expressing her doubts about the accuracy of my explanations.
Interestingly, she is tasked with reviewing our financial statements for accuracy in advance of an upcoming board meeting, bringing even more weight to her misunderstandings.
For context, this situation is occurring at a well-established manufacturing company with a revenue of $15 million, far from the realm of a fledgling startup where one might expect less sophistication in Accounting practices.
Her confusion didn’t end there; she also raised concerns as to why our cash flow statement didn’t align with the profit and loss statement, seeming genuinely puzzled when I clarified that net income does not equate to cash flow.
I find myself questioning how someone can navigate 20 years in the finance world without mastering these essential principles. This leaves us to ponder whether she has been fortunate enough to occupy roles where the core work was delegated to others or if there’s an issue of inflated credentials at play.
As we proceed, it will be critical for us to ensure robust oversight of our financial practices and continue promoting a
No responses yet