The Amended Federal Trade Commission (FTC) Franchise Rule (the Amended Rule), which came into effect in the U.S. in July 2007, offers a welcome change for Canadian franchisors looking to expand into the lucrative U.S. marketplace. In recognition of increased globalization and the need to facilitate expansion by foreign franchisors into the U.S., the FTC has confirmed that the Amended Rule introduces an equivalency standard for accounting. Section 436.5(u) under Item 21 of the Amended Rule stipulates that financial statements must be prepared “according to United States generally accepted accounting principles (GAAP)… or as permitted by the Securities and Exchange Commission (SEC).” Further, these statements must be “audited by an independent certified public accountant (CPA) using generally accepted United States auditing standards (GAAS).”

Expansive Interpretation of Amended Rule

In a “FAQs” bulletin regarding the Amended Rule, the FTC has stated that this provision is not to be interpreted narrowly to mean that only American CPAs are able to audit financial statements. Instead, the FTC interprets this rule expansively to mean that Canadian or other foreign accountants or accounting firms may audit financial statements provided that they are: (1) registered with the Public Company Accounting Oversight Board (PCAOB), and (2) have recently audited one or more financial statements that have been filed with and accepted by the SEC. Thus, foreign franchisors may use statements prepared under their own country’s GAAP so long as the statements also satisfy criteria published by the SEC and are reviewed by the SEC.

Public Company Accounting Oversight Board

The PCAOB was established under the Sarbanes-Oxley Act of 2002 and is responsible for setting and monitoring auditing standards. Because the PCAOB requires foreign accountants to register with it before being permitted to audit financial reports for public companies, the FTC believes that foreign accountants must similarly register with the PCAOB before being allowed to audit financial statements for franchise disclosure. Foreign accountants must also meet any further SEC qualifications, including a review by the SEC to ascertain that filings have been prepared in accordance with GAAP and that audits have been prepared using GAAS. The FTC will interpret accounting and auditing standards under the Amended Rule consistent with SEC practices.

In July of 2005, Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000, was amended to permit recognition of financial statements audited by foreign accountants. Instead of being required to meet the standards provided in the Canadian Institute of Chartered Accountants Handbook, financial statements prepared in the franchisor's home jurisdiction may be used if they are equivalent to the Canadian standards. The addition of this provision has been a positive change for foreign franchisors who want to bring their businesses to Canada. The introduction of an equivalency standard under the Amended Rule is a similarly welcome change because it removes one of the major obstacles related to U.S. expansion faced by Canadian and other foreign franchisors under the previous federal disclosure requirements.