MMFLA CPA Attestations for Applicants and Operators – What to Know and How to Prepare
Michigan’s Medical Marijuana Facilities Licensing Act (MMFLA) requires marijuana businesses to submit two types of CPA attestations. The first attestation focuses on the operator’s initial ability to meet stated capitalization requirements. The second acts as a monitoring tool for existing operators and their ongoing business activities. Both MMFLA required CPA attestations must be performed by an independent CPA following relevant accounting standards. These accounting standards govern CPAs and the work they perform.
Historically, the marijuana industry has not received passing marks for its accounting compliance and adherence to best practices. From tax court case after tax court case decided in the IRS’s favor, to cash management problems, and in still too many cases a disregard for accounting formality entirely, the industry has certainly experienced its share of accounting shortfalls.
Setting a different expectation, Michigan requires all medical marijuana businesses to undergo the initial attestation during the license application process. This attestation may be an examination, review or agreed upon procedures. The initial attestation helps the Marijuana Regulatory Agency (MRA) determine if the applicant has a sufficient amount of capital required before being granted a license. The CPA takes steps to inspect the source of the capital, as well as its availability for use by the marijuana business.
MMFLA CPA Attestations: Capitalization for Licensure
Rule 12 of the MMFLA rule set defines the need for a licensed certified public accountant to perform a formal attestation of a potential operator’s financial ability to capitalize the business. The business should have an understanding and forecast of potential costs needed to begin operations, which may exceed the minimum stated capitalization thresholds for licensure. The CPA performing the attestation must meet both MRA requirements and also American Institute of Certified Public Accountants (AICPA) requirements.
While the MMFLA may have a demanding and complicated rule set for marijuana businesses to follow, the AICPA rules a CPA must follow are much more complex.
Not only are CPAs required to have an appropriate level of knowledge and experience when performing an engagement, they must follow strict quality control, documentation, and record keeping procedures. CPAs must also adequately analyze risks associated with an attestation engagement and plan their work accordingly. For example, if an applicant can show they have $300,000 in a financial account for a provisioning center application, the CPA must perform procedures to determine the source of the funds, and whether they may already be obligated or needed to pay other payments, and not entirely available for the marijuana business’s use. Tax obligations on liquidating the funds may also need to be considered, calculated and reported.
During the process, the CPA should request supporting documentation to disclose debt obligations, such as loans, lines of credit, and tax liens. It is not enough to just look at these documents and provide a “sign off”. The CPA must perform internal compliance steps, and document fully their procedures and the relevant information they relied on. Any findings, discrepancies, or misaligned information require further questioning and resolution. Capitalization must have its existence supported, be available, and not have circumstances that may prevent its use.
A CPA may use their best judgement in planning and performing the capitalization attestation. That is, as long as this best judgement follows attestation standards. Cutting corners, skipping procedures, or not seeking to fully inspect, analyze and document all relevant financial information may lower costs, but it can also be detrimental to the business operator and the CPA in the long run.
CPAs performing attestation engagements are also required to undergo peer review. Peer review is an attestation on the CPA and its firm. A separate, independent CPA firm reviews the engagements performed by the reviewed CPA. The reviewer also evaluates the CPA’s compliance, internal workflow and documentation, and adherence to accounting standards. Many small firms do not perform attestation work otherwise and may not be in compliance if they perform an attestation on an MMFLA client without undergoing peer review. It is important to question the CPA engaged to perform attestation work to ensure their qualifications and understanding of the standards they need to follow.
Once the CPA performs the initial capitalization attestation, they may be asked to update the information if sufficient time has passed between submission and the operating license being granted. In this case, the CPA should request enough documentation to support asset and liability balances have not materially changed. A balance sheet is ideal for showing the final presentation of available capitalization. The balance sheet preparation reflects the date of the relevant financial balances. If an update is required and the CPA has since performed additional non-attest work for the business, the CPA needs to consider if they are still independent and able to conform to standards at the time of the update. If they are no longer independent, the CPA should not perform the attestation update, and an independent CPA should be engaged to perform the updated procedures instead.
MMFLA CPA Attestations: Annual Review Procedures
In addition to the initial capitalization attestation, operating a medical marijuana business requires attestation procedures on an ongoing basis. These procedures, written by the Marijuana Regulatory Agency, require an independent CPA perform them annually.
Marijuana businesses who work with a CPA for their everyday accounting and bookkeeping may find they are in a much better position to undergo the review procedures each year. Even if they don’t, the CPA who performs the procedures must be independent and unfamiliar with the marijuana operator’s accounting records and processes before reviewing them. This means that the CPA who oversees the business’s accounting and bookkeeping may not also perform the annual attestation. However, they can be a great resource during the process and throughout the year to help ensure the annual attestation goes smoothly and the necessary information is there.
Components of the Annual Review Procedures
There are a minimum of five attestation procedures that must be performed annually for each MMFLA operating business. Provisioning centers require an added procedure, and operators with licensing agreements require an additional procedure as well. The MRA defines and publishes the procedures.
The first procedure involves testing revenue transactions. Operators should prepare to have line by line transactions sampled for testing. Transactions will need to agree to METRC, point of sale reports, the accounting system, and ultimately be traceable to the general ledger, bank deposits or cash log.
Can your business trace transaction by transaction now?
The second procedure involves testing expenditures. Disbursements of cash must agree to accounting entries and source documents, like receipts, invoices, and canceled checks. Bank transactions and all daily expenditures must be traceable.
Procedures three and four require testing of employee and payroll tax related information. The CPA tests the timeliness of payroll tax forms and payment remittances. Employee classifications for employees on payroll or for independent contractors require inspection and reporting. The IRS has regulations in place related to payroll tax remittances and employee classification. Marijuana business owners will need to ensure appropriate classifications and record keeping are in place.
The fifth procedure focuses on disbursements to owners. The independent CPA performs testing to inspect whether payments to owners are in agreement with the operating agreements on record. Any payments to “off the record” owners would also result in a reportable finding in the CPA’s report.
The sixth procedure tests licensing agreements. Licensing agreements are common among processors and cultivators. Payments, markups, licensing fees, per unit costs, or other variables of licensing agreements must be disclosed and tested to ensure that payments are in conformance with agreements on record. Transactions traced through METRC should agree to the licensing agreements in place.
Is your business adhering to only disclosed licensing agreement terms?
Finally, the last procedure is for provisioning centers only, and focuses on excise taxes reported. Excise taxes were only applicable for medical marijuana provisioning centers through March 6, 2019. Watch for possible updates to this procedure, perhaps to address sales tax payments.
Marijuana businesses should expect the full process for the annual procedures to take several weeks or longer to complete. The CPA will plan time onsite to inspect business records. They will also inquire of the owner and staff involved with making accounting entries. Samples randomly chosen from METRC reports and other data provide a basis for testing the transactions during the time period. Unprepared businesses who do not consistently maintain a compliant accounting environment will find themselves struggling through this process. Or worse, potentially resulting in failure and non-renewal of their license.
The purpose of a CPA attestation is to uphold credibility in financial reporting. An MMFLA business or applicant should seek to do this through their own proactive intentions. Operating businesses should work with a CPA for their everyday accounting needs. They can help maintain well ran accounting processes and facilitate the review performed by the independent CPA each year. Financial compliance matters greatly in the marijuana industry, especially to operators in Michigan. At the end of the day, it is the CPA profession’s purpose to help ensure accounting integrity. For marijuana businesses, working with a CPA is essential to their day to day and long term successes.
At LC Solutions Michigan PLLC we put our focus on supporting accounting best practices for all cannabis businesses. Whether it’s an initial capitalization attestation or the annual procedures, our firm has the right experience to ensure compliance for Michigan’s MMFLA operators. We can help you understand the complexities of these requirements and how to best respond to them. Our CPAs and accounting professionals have helped businesses and individuals all across Michigan manage their accounting needs operating in the regulated marijuana industry. From attestations, CFO services and business strategic planning, to bookkeeping, tax preparation and accounting system set up, our firm can help your business implement and maintain a successful accounting environment.
Copyright by LC Solutions Michigan PLLC
January 12, 2020