Peachtree Enviro-Management Systems
Peachtree Enviro-Management Systems is a large provider of trash hauling
services primarily in the Atlanta area. The company grew in its early years from $1
million in assets, $700,000 in revenue, and $100,000 in net income in 2004 to $20
million in assets, $15 million in revenues, and $4 million in net income in 2007. During
2008 through 2009, the company was audited by Spahn and Burdette LLP. In 2011,
Peachtree changed its auditors to Aaron and Matthews LLP. The audit engagement team
for Aaron and Matthews developed the following information during its audit of the
financial statements of Peachtree.
Year Assets Revenues Net Income
2007 $20 million $15 million $4 million
2008 $30 million $21 million $6 million
2009 $35 million $25 million $7 million
2010 $40 million $30 million $16 million
Peachtree Enviro-Management had expanded during the time period by acquiring
very profitable, smaller trash hauling companies. Peachtree took control of the selling
companies’ stock and consolidated the net assets into its year-end financial statements,
but the trash hauling companies continued to operate as separate legal entities.
In 2011, Peachtree decided to paint all the trash hauling equipment of the acquired
companies at Peachtree’s cost in order to have a common logo on the side of all trucks.
The total cost was $10 million; the accountant for Peachtree recorded these costs as
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capitalized fixed asset amounts and included them in the property, plant and equipment
account on Peachtree’s books. Peachtree had set an estimated ten-year life with no
salvage value. The straight-line method of depreciation was used.
The audit engagement team of Aaron and Matthews scheduled a meeting the next
day to discuss the accounting for the painting costs.
This case discusses the effect of a capitalized versus expensed transactions.
Ethical Issues
Peachtree is capitalizing $10 million repainting of collection trucks. This accounting
treatment is not in accordance with GAAP, which would require expensing of the
painting as maintenance and repair. Stakeholders of the company expect and deserve
financial statements in accordance with GAAP and with adequate disclosures/
Questions
1. Do you think the painting costs should have been capitalized? Why or why
not. Use your knowledge of accounting rules to answer this question.
Generally paint does not increase the value of asset; it is more like maintenance and
repair expense. Since it is doubtful that the paint job will last 10 years, it should not have
2. Prepare an annual percentage analysis of the following amounts for the time
period 2007 to 20010:
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a. Revenue as a percentage of assets
b. Net income as a percentage of revenue
c. Net income as a percentage of assets
Do any of these relationships provide red flags that might cause you to
further examine the relationship(s)? What would you look for? Why?
2007 2008 2009 2010
Revenue to assets 75% 70% 71% 75%
3. Given the information in this case, do you believe errors in the application of
accounting principles have occurred? Why or why not? Do you believe
fraud has occurred? How would you know the difference?
Errors would be random and cancel each other out to that the net change would be
small. Revenue increasing $5 million, assets increasing $5 million, expenses
4. What might have motivated the management of Peachtree to account for the
painting costs as capital items? Use ethical reasoning to evaluate
management’s actions.
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Management of Peachtree may be motivated by the desire to receive a bonus or fear
of market reaction to fluctuating and decreasing net income. With the painting of the
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