The Audit–What Is It Good For?

The quarterly store audit is something every franchisee is well aware of, as it is mandated by every franchisee agreement. However, in the past few years the audit process has changed and is no longer the effective tool it was for franchisees in the past.

Prior to the 2004 agreement, the franchise agreement specified monthly audits. During that time, franchisees knew every month the inventory variation charge and could quickly initiate corrective action. But now with the change to quarterly audits, franchisees can be financially devastated within a three- to six-month audit period.

It seems that SEI made the change from monthly audits to quarterly audits as a cost saving measure—the cost of an audit is $215, so quarterly audits save the company $1,720 annually for every franchised store. Today, corporate stores still receive monthly audits. This seems to be one more example of SEI no longer being truly concerned with the franchisee’s financial well being.

The latest change to the audit workup process further harms franchisees. SEI used to complete the audit workup using all the information submitted by franchisees as “BI—Before Inventory.” This included outstanding invoices and credits. When the audit results were sent to the store, the franchisee knew the actual inventory variation.

Today, SEI uses the invoices document generated by the audit provider the day of the audit as a BI invoice. SEI no longer maintains a pending file of outstanding invoices or credits for any store, which means the audit workup is inaccurate. Instead, audit adjustments are made between the audits, so the franchisee does not know the true audit result. Many vendors are very slow to process credit invoices, and SEI will not process submitted credit invoices for at least 45 days. In the meantime, franchisees are saddled with the expense of an audit shortage charged against their monthly financial statement while they wait for audit adjustments they know belong to them. Franchisees with equity issues are further burdened with searching for money to maintain minimum equity requirements.

This is not fair. SEI is generating income they are not rightfully entitled to receive at the expense of the franchisee. Franchisees are following the process established solely by SEI to document pending vendor credits, and yet are being financially penalized by an audit workup process controlled by our franchisor that was initiated as solely a cost saving measure. SEI knows that some vendors regularly have outstanding credits that exceed the charges owed them, yet those credits are ignored as part of the audit workup.

It seems franchisee’s best interests are being ignored by SEI, and this issue is causing franchisees financial harm. Franchisees deserve to receive a true and accurate statement of their inventory variation, not a meaningless number that will change daily.