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The Annual Financial Statement

On October 3, 2019, the Michigan Regulatory Agency (MRA) issued an advisory bulletin seeking to clarify the financial statement review requirements of the MMFLA. An oversight by many, and perhaps even completely disregarded by a few, these financial statements and the required procedures which must necessarily be applied to them, are likely to cause as much confusion as initial CPA Attestation required for prequalification under the Michigan Marijuana Facilities Licensing Act.

The MRA followed up on that bulletin on June 3, 2020 with additional guidance on those reports. In addition to 6 additional reporting requirements, the updated bulletin also provided practitioners and licensees a workbook containing 15 separate spreadsheets necessary for compliance.

While additional guidance is sure to follow, here are 5 key takeaways from what we know already.

1. The Bulletin departs from the Regulations - While the regulations call for a set of financial statements “reviewed by a Certified Public Accountant”, the Bulletin (and hence the MRA) changed the terms from a review to an agreed upon procedure engagement (both of which require the CPA to attest in some form). Confused? Don’t be – most practitioners can’t even agree on the aspects that differentiate the two engagements. For purposes of Michigan Marijuana licensing act (or the MRA), it’s important to note that a review requires consistency in the procedures performed on every account. An agreed upon procedure engagement, however, identifies only seven procedures which must be performed to meet the compliance requirement.

2. Independence is Required – By now, most of the Michigan firms engaging in cannabis related ventures have found a qualified financial professional to assist in the financial record keeping of the business. The ability to leverage those existing relationships in the completion of the reports can be jeopardized if independence has been lost along the way. The biggest threat to independence in this context is the Self-Review Threat (or threat that independence is jeopardized when a practitioner performs procedures on their own work). As the reports are intended to be relied upon, the threat that certain transactions may be overlooked, or not reviewed with an appropriate level of due diligence is ever present.

3. The Scope of the Engagement will vary depending on the size of the Licensee – The updated bulletin identifies several transaction cycles for CPA’s to test, including the revenue cycle and disbursement cycle. The depth and extent of those test, however, depend on the size of the firm.

4. Hidden Ownership – Additional procedures designed by the LARA focus on relationships with the licensee which may uncover disguised ownership arrangements. For example, the engagement requires the CPA to identify and obtain a list of the top ten (10) vendors for each licensee. Of the top ten vendors, five (5) will be selected for tracing (a method of collecting evidence). A large discrepancy between payments across different vendors may give an indication of a compensation arrangement.

5. Not Just Numbers – Apart from the Review Report (a standard letter required for all attestation engagements), the reporting requirements provide an additional departure from the Clarified Standards that most CPA’s are accustomed to. In addition to the questionnaire – which requires the CPA to provide a sequenced narrative of the licensee’s cash procedures, the ability to explain any relevant departure or outlier is also available within the standard report.

The deadlines for filing these reports are below.

Final Thoughts

As one of the original practitioner’s in the state to provide attestation services for Cannabis related companies – Sherman J. Taylor CPA is well positioned to provide licensees with a streamlined process to ensure tax compliance.

To schedule an appointment or to find out more, please contact us at 248-845-8015 or email us directly Admin@SjtaylorPC.Com. Use “Financial Statement Review” in the subject line to receive a 10% discount on your final invoice.

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