Earnings manipulation has been the subject of considerable attention both in the financial press and in academic research. For example. The Wall Street Journal, Forbes Magazine, and Business Week have all carried pieces on suspicious income and the 1988 Supplement to the University of Chicago's Journal of Accounting Research is devoted exclusively to studies addressing earnings management. Interestingly, many of the earnings manipulation issues disclosed by the press have resulted in professional pronouncements intended to improve the quality of reported earnings, among them FASB Statement No. 45, "Accounting for Franchise Fee Revenue."

Required: 

Using the annual report file in the National Automated Accounting Research System (NAARS) or copies of annual reports in a library, select the annual reports of three national franchisors (e.g.. Burger King, Century 21, Holiday Inn, McDonald's, Radisson Inns, Taco Bell, U-Haul) and draft a report that accomplishes both of the following:

1. Compare the footnote and line-item disclosures for area development and individual site franchises.

2. Using FASB Statement No. 45, paragraphs 5 through 11, as a guide, list and explain the questions an auditor would ask the management of any one of the three franchisors to monitor whether the franchisor complied with generally accepted accounting principles.