ADVICE
financial discrepancy is discovered in excess of a specified amount then all of the costs of the audit are to be paid by the franchisee. While such provisions could appear draconian or punitive, a sensible franchisor will ensure that they are not viewed in this way by carrying out regular audits throughout its network on franchisees selected at random. Obviously, if a particular franchise outlet is causing concern or is consistently slow in producing accounting information, it may be seen as a signal that an audit should be undertaken to discover what is causing the accounting issue, whether the franchisee’s books and records are being properly maintained, and to ensure that full financial disclosure has been given to the franchisor.
“Utilised properly, audits can be of enormous assistance in maintaining the integrity, reputation and financial wellbeing of a franchise network”
Another positive purpose of an audit is, of course, to identify any areas where the franchisee could improve its accounting function or business practices generally to make it more efficient and increase productivity and profitability.
and sometimes to little or no effect. How, then, can such situations be avoided? Ultimately, the answer is that it is impossible to eliminate altogether the chances of a franchisee ‘cooking the books’. There is, however – or should be – a weapon in the franchisor’s armoury that can significantly reduce the risk and at the same time recover what would otherwise be lost income for the franchisor. Somewhere in any well-drafted franchise
agreement there should be a provision entitling the franchisor to undertake an audit of the franchisee’s business and accounting
records whenever they wish to do so. Some franchise agreements enable the right to be exercised without notice and entitle the franchisor to enter into any premises, showroom or even the franchisee’s home, to investigate their accounting records, take copies and make enquiries of the franchisee. The franchise agreement should go on to provide that any attempt to obstruct the audit or refusal to cooperate with the franchisor’s investigation will constitute a serious breach of the agreement, entitling the franchisor to terminate it. The agreement can also provide that if any
Audits should always be undertaken by someone with suitable accounting qualifications, otherwise they risk lacking credibility. There are many firms offering investigative accountancy services by suitably qualified professionals; see the bfa website for a list of affiliated providers. The audit is a tool capable of providing useful information to both franchisor and franchisee and, if a franchisor wants to look at it this way, to keep all the franchisees in its network ‘on their toes’. Utilised properly, audits can be of enormous assistance in maintaining the integrity, reputation and financial wellbeing of a franchise network. n
ANDREW HAYWARD
Andrew Hayward is a director in the franchise team at Owen White Solicitors.
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