The Surprising Gap in Expertise: A New finance Director’s Lack of Understanding of Depreciation
In an unexpected turn of events, our organization recently welcomed a new finance Director, a position she assumed with a solid background featuring over two decades of experience in corporate finance, a Big 4 pedigree, and an MBA from a prestigious institution. As a senior accountant reporting directly to her, I was optimistic about what her leadership would bring to our financial practices.
However, during a routine review of our monthly financial close process, I encountered a surprising situation. While explaining our standard Accounting practices, the new director asked a question that left me momentarily speechless. She inquired why we “waste money every month on depreciation expenses,” noting that these costs seemed illogical since they didn’t involve any out-of-pocket expenditures at that moment.
Initially, I assumed she was testing my knowledge. With patience, I explained that depreciation serves a crucial purpose: it allocates the cost of tangible assets over their useful lives, thereby aligning expenses with the revenue generated during those periods. But to my dismay, her expression remained blank as she stated, “But we already paid for the equipment. Why are we expensing it again?”
As I attempted to clarify this fundamental Accounting principle under Generally Accepted Accounting Principles (GAAP), she requested a step-by-step walkthrough, deeming the explanation “unnecessarily complicated.” For the next half-hour, I detailed concepts routinely covered in introductory accounting courses, hoping to bridge the apparent knowledge gap.
Her confusion continued with a question about our recent acquisition of a $50,000 server. She suggested that we should simply expense it to secure a tax write-off for the current year instead of capitalizing the cost over multiple fiscal periods. When I elaborated on capitalization thresholds and the difference between asset classification and expenses, she proposed consulting with our tax expert, expressing doubt about the appropriateness of our approach.
To compound my concerns, she was tasked with reviewing our financial statements for accuracy before our upcoming board meeting. This is particularly worrisome given that we operate a manufacturing company with $15 million in annual revenue, far removed from the realm of smaller startups where lax accounting might be somewhat more expected.
Moreover, she also questioned why our cash flow statement did not align with the Profit and Loss statement, appearing perplexed when I explained that net income and cash flow are not synonymous.
These conversations have left me questioning how someone with her extensive experience could be unaware of such foundational concepts in finance
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