When Understanding Depreciation Becomes a Challenge for Leadership
Recently, our organization welcomed a new finance Director, a position that typically inspires confidence given her extensive experience. With over two decades in corporate finance, a background at a prestigious Big 4 firm, and an MBA from a well-regarded program, her credentials seemed impressive at first glance. However, an amusing yet concerning encounter during our monthly closing process has raised eyebrows.
About six weeks into her tenure, I was guiding her through our standard procedures when she posed a rather surprising question: why we incur “wasted money” on depreciation each month despite not physically spending anything. Initially, I assumed she was pertaining to a test of my knowledge, so I elaborated on the concept of depreciation. I described how it allows us to allocate asset costs across their useful lives, effectively matching expenses to the revenue they help generate.
Her reaction was puzzling; she stared blankly and questioned why, if we had already paid for the equipment, we were incurring additional expenses. I endeavored to clarify, referencing basic Accounting principles and the GAAP standards that govern our practices. To my astonishment, she requested a detailed walkthrough of the concepts, which, I must emphasize, should be fundamental knowledge for someone in her role.
The situation only escalated when she inquired why we couldn’t consider expensing a new $50,000 server in its entirety for tax benefits rather than capitalizing it. I attempted to explain the distinctions between capitalization thresholds and asset classification, only to have her encourage consulting with our tax advisor, voicing her disagreement with the current practices.
As if this wasn’t enough, she is scheduled to review our financial statements for accuracy—an obligation crucial for board meetings next week.
To provide a bit of context, our company is a sizable manufacturing entity, generating $15 million in revenue, which raises questions about the expectation of formal Accounting familiarity at her level.
Moreover, she expressed bewilderment when reviewing our cash flow statement, confused about why it didn’t align with the profit and loss statement. I had to clarify that net income and cash flow are not synonymous, further underscoring the gaps in her financial knowledge.
Reflecting on these events, I can’t help but wonder how someone can ascend in the finance world for so long without mastering these basic tenets. It begs the question: has she been coasting by while others handled the core responsibilities, or is there an issue with the inflation of her
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