Understanding CPA Attestation Requirements of the MMFLA

Applicants are always scrambling to gather all their financial documentation necessary to complete their cannabis business license application. All this just to turn in their application as soon as possible. Shortly thereafter applicants are finding the State of Michigan, Department of Licensing and Regulatory Affairs (LARA) issued a Notice of Deficiency on their application. One of the many steps applicants miss, or don’t complete properly, are the CPA attestation requirements.

Do you need help with your license application? Need help understanding CPA attestation requirements? Request a consultation now.

Being First Isn’t Always the Best

At the Cannabis Legal Group, we’ve always stressed the importance of submitting the best application rather than being the first.

We’ve found that a large number of applicants have been issued a Notice of Deficiency for a number of reasons.

One of the main reasons for these deficient applications is that the CPA attestation requirements haven’t been completely or properly met.

Working with a cannabis attorney who is also a CPA can help with putting together the best application possible.

LARA issued an Advisory Bulletin in 2018, which reads as follows:

Certified Public Accountant (CPA) Attestations

“The purpose of this bulletin is intended to address requests for clarification on the issue of CPA attestations and capitalization as provided in Rule 11 of the Emergency Administrative Rules filed on December 4, 2017.

• For clarification purposes, the CPA attested financial statement of assets used to provide the total capitalization amounts that are required by Rule 11 must meet the following criteria:
  1. It must be prepared and attested by an individual who is a CPA in any state or prepared and attested by a CPA firm from any state. Funds originating from a foreign country must be attested by the equivalent of a CPA in that foreign country and must then be attested by a CPA in the United States. And
  2. It must be an attested service as defined in MCL 339.720(1)(a)(v) (or the foreign equivalent) – meaning it must be an examination, review, or agreed-upon procedures engagement to be performed in accordance with the statements on standards for attestation engagement, other than an examination of prospective financial information. A compilation is not an attested service under MCL 339.720(1)(a)(v) and does not meet the attestation requirements of Rule 11. And
  3. It must document both the sources and value of each asset used to provide capitalization and total amount of the applicant’s capitalization to operate and maintain the proposed marihuana facility. Proof must be provided that there is no lien or encumbrance on the asset.

• The capitalization requirements found in Rule 11 must be met individually for each state operating license (by type of marihuana facility) for which the applicant intends to apply. Persons intending to apply for multiple state operating licenses must provide a statement(s) attesting to assets to meet the capitalization requirements for each state operating license. The value of an asset may only be used to meet the capitalization for one state operating license.
• The sources of capitalization provided by persons or entities on behalf of the applicant (e.g. loans, lines of credit) must be accompanied by a Statement of Money Lender, be supported by documents creating and securing the debt, and must be attested by a CPA as indicated above. The CPA attestation of those funds may be included in the applicant’s CPA attestation of total capitalization or may be provided by a separate CPA attestation of the loaned funds.”

Providing Documentation Without Assurance

Applicants have been merely providing a “compilation” of their financial resources.

In a compilation engagement, the objective is to assist in presenting financial information in the form of financial statements without providing any assurance that there are no material modifications that should be made to the financial statements so they’ll conform to the acceptable financial reporting framework.

Because of the even more limited scope of compilation procedures, the CPA’s report will not express an opinion or provide any assurance regarding the financial statements.

Compilations Are Not Sufficient

The reason a compilation isn’t sufficient is that Michigan is looking for some assurance on the financial background of the applicants.

A compilation just doesn’t provide this.

Instead and in order to provide assurance, a CPA performs a “review or audit” engagement or some other “agreed upon procedure” or “examination” engagement.

A CPA can obtain a level of “assurance” about whether the financial statements are in accordance with the financial reporting framework with these types of engagements.

The CPA obtains assurance by obtaining evidence.

There are different levels of assurance that a CPA can obtain which can range from no assurance at all, as with a compilation, to the highest level of assurance, with an audit, or even somewhere in between with a review, an agreed upon procedure or examination engagement.

A review and examination engagement are more time consuming to complete than a compilation, but substantially less than an audit.

Final Thoughts

In conclusion, an audit requires a substantial undertaking by the CPA and involves the most work and time to complete.

An audit engagement would be beyond the scope of what the state of Michigan requires and therefore not necessary.

Instead, the recommendation is to provide a review and examination engagement as the engagements objective is to obtain limited assurance as a basis for reporting whether the CPA is aware of any material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework, primarily through the performance of inquiry and analytical procedures.

This level of assurance is sufficient to meet the CPA attestation requirement of the licensing application.

Remember, it’s about presenting the best application in order to win your license.

Do you need help with your license application? Need help understanding CPA attestation requirements? Request a consultation now.