As expected, the majority of this year’s State Regulatory Update Workshop at the Annual ABA Forum on Franchising Annual Meeting in San Diego, focused on the new NASAA Statement of Policy Regarding the Use of Franchise Questionnaires and Acknowledgments. However, other important topics were discussed as well. This is where the audience learned that one easy service we can do for our franchise system clients heading into franchise updating and renewal season is to remind them to check that their outside auditor is in good standing.
Speakers, Senior Assistant Dale Cantone and Assistant Chief Counsel Theresa Leets, explained that there has been an uptick in franchise registrations with financial statements submitted by auditors that do not have a certification to conduct and issue audits. The issue came onto state regulators’ radars after an examiner conducted an internet search and discovered a state franchise registration application submitted an audit by uncertified firm. The news was quickly disseminated among state franchise examiners. Other state regulators started checking applications as well. Once state examiners started checking the status of the CPAs with licensing authorities, many violations were discovered.
California even has the capacity to run a report that easily determines how many state franchise applications were filed during a period of time using non-licensed CPAs. Although franchise systems may argue that they too were victims of an unlicensed auditing firm, the state regulators do not see it that way. Item 21 of the FDD, under both the FTC Franchise Rule and NASAA Guidelines, require that the financial statements “must be audited by an independent certified public accountant” and every application contains a Certification signed by the franchisor. It is up to the franchisor to do its due diligence. Further, if a state like California already has a case open after running its own diligence, then it is not considered a “self-report” and all franchise systems will be treated the same way. States have ordered franchise systems to obtain new audits and provide them to franchisees and some state regulators have even required franchisors to make rescission offers to franchises who received financial statements prepared by a non-certified CPA. Therefore, we strongly recommend franchise systems check to make sure their CPA is certified before they reach out to start the audit process for the 2022 end of year,
There are a number of free resources available to check the certification status of a CPA. The National Associate of State Boards of Accountancy (NASBA) maintains a website available here and the Association of International Certified Public Accountants (AICPA) also maintains a list on its website of members who have not maintained their CPA status, available here.