Under what condition are misstatements considered material in the combined consolidated financial statements of Carls?
Carls Franchise · 2024 FDDAnswer from 2024 FDD Document
Our objectives are to obtain reasonable assurance about whether the combined consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the combined consolidated financial statements.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 79–80)
What This Means (2024 FDD)
According to Carls's 2024 Franchise Disclosure Document, misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the combined consolidated financial statements. This definition is used by the independent auditors, KPMG LLP, in their audit of the combined consolidated financial statements of Carl's Jr. SPV Guarantor LLC and Hardee's SPV Guarantor LLC and their subsidiaries. The auditors' report covers the combined consolidated balance sheets as of January 29, 2024, and January 30, 2023, and the related statements of income, members' deficit, and cash flows for the fiscal years then ended.
For a prospective Carls franchisee, this means that the financial statements presented in the FDD are audited with the goal of ensuring they are free from misstatements that could significantly impact a reasonable person's investment decisions. The audit aims to provide reasonable assurance, although it's not a guarantee against all misstatements, especially those resulting from fraud. The auditors assess the risk of material misstatement, evaluate accounting policies, and review management's estimates to form their opinion.
It is important to note that the risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. This highlights the importance of a thorough review of the financial statements and related notes by potential franchisees, possibly with the assistance of a financial advisor, to understand the financial health and performance of Carls.