Audit Disclosure Checklist for Our Client’s Financial Auditors

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As you prepare the annual audit of the financial statements of our franchisor client, we want to provide a short checklist of the requirements of the state and federal franchise laws so that we can all plan for a smooth franchise renewal season. The financial disclosures you are preparing are vital to the franchise disclosure documents required of our client, and we urge you to contact us directly with any questions.

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1. The franchise law requires that all franchisors include in their franchise disclosure document (“FDD”) three years of audited financial information prepared according to US GAAP or as permitted by the SEC. The level of audit is the highest: certification. A compilation or a review will not be accepted for the year-end audit.
    

2. The year-end audited statement MUST be presented in a tabular form (a columnar comparison) that shows the multiple years’ figures. The company’s balance sheet must compare in a columnar format the previous TWO fiscal years before the disclosure document date (the FDD will be dated about 90 days after the FYE, usually dated March 31). The audit must also present the statements of operations, stockholder equity, and cash flows for each of the franchisor’s previous THREE fiscal years. The states have let us know that they will no longer accept separate-year statements; the financials must include and compare the previous two-year’s audit information. If there is a reason this is not possible, or unreasonably difficult or expensive, please advise us immediately. If your firm did not conduct the audit for one or two of the previous two years before the period under audit, you will certainly not be asked to incorporate another firm’s audit report into your own, but we will need to know about it for explanation to the states.
    

3. Please send us an image (PDF format preferred) of a draft of the audit before it goes into final form. We have found that the opportunity to review a draft can avoid some huge inefficiencies if we can flag any ways that the draft is out of step with the FDD. This is particularly true regarding descriptions of the franchise network in your footnotes. If your footnoted description is out of step with the statistical information we present in Item 20 (such as the number of operating franchisees as of the FYE), state examiners will insist on reconciliation. Please send the draft audit and the final form audit to us at acaffey@caffeylegal.com.
    

4. We may need an unaudited statement for various reasons during the course of the year for a stub-period that is less than a full fiscal year. These must generally be prepared according to US GAAP, and a compilation or review statement will be fully acceptable. The statement must be a full statement (balance sheet, statements of operations, stockholder equity, and cash flows) for the period starting on January 1 and concluding on a date that is no more than 90 days before the date we submit our application to the franchise registration state.
    

5. IF our mutual franchisor client is renewing its registration in any franchise registration states, we will need a Letter of Consent (addressed to the President, Board of Directors or the Managing Members, as appropriate) to include the year-end audit and your firm’s report in the company’s FDD. Please send an image (PDF format preferred) of the consent letter to us at “acaffey@caffeylegal.com”. This consent letter must appear on your firm’s letterhead, must show an image of a signature, and must specifically describe the date of issuance of the FDD (check with us – most are dated March 31), the date of the statement, and your dated report. Consent Letters that do not follow these instructions to the letter will have to be re-done. If you have any questions about this letter, or you can send us a draft for review, please let us know. Please follow this form:
   
   [On Accounting Firm Letterhead]
   
   _____________________________[Name of CPA/Firm] consents to the use in the Franchise Disclosure Document issued by ___________________ (“Franchisor”) on ____________________ [date of FDD issuance – please check with us, usually March 31], as it may be amended, of our report dated _____________ [date of accountant’s report], relating to the financial statements of Franchisor for the period ending _________________[date at end of period under audit].
   
   [Manual or Digital Signature of CPA/Firm]
    

6. Timing. Franchisors have a particular need to receive the year-end audit in a timely fashion. Federal franchise law requires that the year-end audit be included in the FDD no more than 120 days after the end of the fiscal year. Franchise registration states may have expiration rules that require the audit within 90 days of the FYE; it will depend on the states in which our mutual franchisor client is planning to renew. Please talk to us about plans to prepare the audit and your anticipated timing.
   
    

You may be interested in reviewing the full financial disclosure requirements issued by North American Securities Administrators Association. You will find them at the following link (see Item 21, “Financial Statements,” beginning at page 66; and Consent Letter instructions on pages 20-21): http://www.nasaa.org/wp-content/uploads/2011/08/6-2008UFOC.pdf

 

Thank you for your work on behalf of our mutual franchisor client. We would appreciate your confirming that you have received this memorandum by a short email to us at acaffey@caffeylegal.com so we know that the information loop has closed. Please email us at acaffey@caffeylegal.com if you have any questions or need additional information.