Audit for FDD (Franchise expansion in the United States)

When expanding a franchise business in the United States, it is legally required to prepare a Franchise Disclosure Document (FDD), which includes audited financial statements under Item 21.
This requirement is based on the U.S. Federal Trade Commission (FTC) regulation, 16 CFR § 436.5(u), which mandates that franchisors (the parent companies) must have their financial statements audited in accordance with U.S. Generally Accepted Accounting Principles (US GAAP) and U.S. Generally Accepted Auditing Standards (US GAAS).

In particular, audited financial statements must be submitted at the time of executing a franchise agreement or soliciting new franchisees in the U.S., making such audits an essential step for companies seeking to enter the American market.

However, it is by no means easy for a non-listed Japanese company that prepares its accounts under Japanese GAAP to suddenly undergo an audit under US GAAP. In addition to significant differences in accounting standards, disclosure requirements also vary, and companies may be required to prepare statements such as the cash flow statement. As such, it is essential to work with auditors who possess both specialized knowledge and substantial experience.

That said, there is no requirement for such audits to be conducted by one of the “Big Four” accounting firms. For non-listed companies, large firms often become inefficient in terms of both workload and cost, and their services may prove excessive relative to the needs of smaller franchisors.

In fact, mid-sized and smaller audit firms are often more flexible and responsive in how they operate, and they offer significant cost advantages. Reflecting this, we have seen a steady increase in inquiries from small and mid-sized Japanese companies looking to expand into the U.S. and seeking efficient and practical audit solutions.