CPA, or Certified Public Accountant, attestation comes in many forms. Some of the more common are financial statement audits or reviews. On the horizon for Michigan’s commercial medical marihuana facilities are financial statement reviews, required annually for all of Michigan’s soon to be license holders. Most prudent non managing investors may also be expected to require annual or bi-annual audits. The level of attestation required per Emergency Rules 5 and 11 and the Bureau of Medical Marihuana Review November 2017 Advisory Bulletin is a few “less intensive” steps below these, and more appropriately described as “Agreed Upon Procedures”. This is the MMFLA CPA attestation report many applicants and their CPAs are questioning what the process is.
The Michigan Bureau of Medical Marihuana Regulation “BMMR” requires that applicants under the Michigan Medical Marihuana Facilities Licensing Act “MMFLA” meet certain capitalization thresholds and forms, determined by their intended license type. The BMMR, under Michigan’s License and Regulatory Affairs Board “LARA” has set the following capitalization thresholds:
Grower: Class A – $150,000.00. (b) Grower: Class B – $300,000.00. (c) Grower: Class C – $500,000.00. (d) Processor: $300,000.00. (e) Provisioning Center: $300,000.00. (f) Secure Transporter: $200,000.00. (g) Safety Compliance Facility: $200,000.00.
SOURCE: MICHIGAN DEPARTMENT OF LICENSING AND REGULATORY AFFAIRS BUREAU OF MEDICAL MARIHUANA REGULATION MEDICAL MARIHUANA FACILITIES LICENSING ACT EMERGENCY RULES, DECEMBER 4, 2017
In this case, we assume capitalization means “net worth”.
Net worth = Assets (-) Liabilities, or in other words, the applicant’s net equity.
Assets – Liabilities = Equity
The CPA’s role is to attest to the amount of net worth the applicatant is claiming to possess– to perform procedures deemed appropriate to inspect the validity of the applicant’s claim to its net worth.
Why require this?
The capitalization requirement may sound unreasonable to some, however it is the amount determined to be needed to start and run a commercial level business with equipment, a building, supplies, employee wages, insurance, and of course regulatory license fees and all other common business expenses – many inflated in cost because of additional requirements vendors and servicers need to adhere to in order to serve the industry.
Without setting a threshold, there is risk that licenses will be granted to applicants who may not be ready or financially stable enough to take on commercial operations.
The CPA’s role is to design procedures that attempt to discover and validate the applicant’s information and presentation of capitalization.
It is not enough to view bank statements supporting capital. The CPA must also request information regarding liabilities and perform other procedures and inquiries, documenting step by step what they did and what their findings were.
Unreported liabilities are a large concern. So the CPA may request specific documentation in attempt to discover unreported or underreported liabilities.
The procedures the CPA performs are detailed in a formal “Attest Letter” addressed to both the applicant and the Michigan Bureau of Medical Marihuana Regulation, along with their findings of what the information showed. The applicant receives a copy of the letter and would then submit this with their application. The CPA would generally not send the letter directly to the BMMR.
The letter and report must be directly from the CPA to the applicant and not prepared by a third party. Additionally, the CPA should engage and enter into contract directly with the applicant to perform the attestation.
The CPA follows attestation standards and guidelines set forth by the American Institute of Certified Public Accountants and the Financial Accounting Standards Board. The process may take several hours or more per applicant to fully inspect the information, document findings, and compose the attest letter. The CPA may also prepare a balance sheet with the amounts found.
Don’t be surprised too if your CPA also requests a detailed list of documents or procedures they will perform. Their job is to be thorough. The profession exists to help ensure the validity of financial and business information presented. The requirement to attest to the applicant’s capitalization is there for a reason, so it’s best to take it seriously.
In fact, take all of your accounting seriously. With CPA attestation requirements increasing over time for Michigan’s Medical Marihuana Facility License holders, look to your CPA as an important advisor to keep your business on track.
For more information on the CPA attestation requirement please contact us here.
LC Solutions Michigan PLLC
January 25, 2018