Marketing Fund Audits

If an agreement directs one party to pay money to a marketing or other cooperative fund, the party must – within three months after the end of the last financial year – prepare an annual financial statement of the fund’s receipts and expenses for the last financial year. This must include amounts spent on production; advertising; administration; goods and services supplied by the franchisor or an associate of the franchisor; and other stated expenses.

Generally, the work performed by the auditor will include:

• A review of the internal control and record keeping procedures of the franchisor to ensure the data used to create the marketing fund statement is reliable.
• Testing of expenses to ensure they are expenses that can be validly incurred by the marketing fund and testing to ensure these are correctly recorded in the statement.
• Testing that royalties paid by franchisees are being correctly recorded in the marketing fund report, and ensuring that all royalties are being recorded.
• Ensuring the statement is reasonable by conducting an independent review.

The cost of an audit is usually borne by the marketing fund. Most franchise agreements provide the costs of preparing and auditing the marketing fund report which can be paid out of fees paid into the marketing fund. The better the franchisor’s record keeping and preparedness, the lower the cost of the audit. The lower the cost of the audit, the more money that can be spent on external marketing activities for the benefit of franchisees and the system as a whole.