MRA Annual Financial Statement Reports

DA Advisory Group is a leading full-service CPA firm in the cannabis space providing tax, audit, consulting, and compliance services to the industry. On June 3, 2020, the Michigan Marihuana Regulatory Agency (MRA) issued an advisory bulletin regarding an Annual Financial Statement report required to be submitted by all Michigan medical cannabis license holders. On January 06, 2021, the MRA issued another advisory bulletin requiring all Michigan adult-use cannabis license holders to submit a similar annual financial statement report. Licensees in the state of Michigan are required to submit an annual financial statement report under the Medical Marihuana Facilities Licensing Act (MMFLA) and the Michigan Regulation and Taxation of Marihuana Act (MRTMA). 

The annual financial statements is an agreed-upon procedure that must be prepared by an independent Certified Public Accountant. This report can be prepared by an out of state CPA but is preferred by the MRA to be prepared by a CPA licensed in the state of Michigan. The MRA report consists of several procedures that the CPA must perform. These procedures are designated by the MRA. The reporting period for each licensee is dependent on their initial licensure date. 

The review process is a thorough review by an analyst of all procedures performed by the CPA. Once an initial review is performed, the MRA will issue a Notice of Deficiency to the individual listed as the contact person related to the report. The individual listed (usually the CPA preparer) will then address these comments by the MRA. Once the necessary support and questions have been answered, the analyst will review the additional responses and support. Once the analyst is satisfied, the report will be passed to a supervisor for review. Once the report is satisfactory to the MRA, the licensee will be issued a certificate of completion.

1. P1 – a questionnaire the CPA must inquire of management regarding employees, banking, legal agreements, and revenue. 

2. P2 – testing of revenue, which consist of randomly selecting sales transactions from Metrc and tracing those transactions to corroborating evidence. (sample size is determined based on revenue).

3. P3 – testing of disbursements, which consist of randomly selecting disbursements from the general ledger and trancing those transactions to corroborating evidence. (sample size is determined based on revenue).

4. P4 – The CPA must obtain a vendor listing from management and determine the 10 top vendors based on dollar amounts. The CPA will then randomly select 5 of the top 10 vendors to test. A minimum of 12 transactions must be tested for each vendor and if there are less than 12 transactions for a vendor then all transactions must be tested. 

5. P5 – the CPA must obtain 941s and compare the gross wages and tax liabilities to the general ledger. The CPA must then trace those amounts to the bank statement or cash log to evidence payment. 

6. P6 – Distribution testing for each equity holder. This consists of tracing distributions on the general ledger to corroborating evidence. (more emphasis on the shareholders of more than 10%).

7. P7 – the CPA should inquire of management for any licensing agreements that were effective at any time during the reporting period. Then the CPA should select 25% of the agreements to test. Testing should include tracing disbursements pursuant to the agreement to corroborating evidence. 

8. P8 – the CPA should inquire of and obtain from management a list of all agreements that provide management or any other type of service necessary for the operation of the licensee. The CPA must then select 25% of the agreements and trace services provided per the agreement to corroborating evidence (payment terms, amount paid to services provider, etc.).

9. P9 – Testing of excise tax by obtaining quarterly filings reported to Michigan Department of Treasury and tracing amounts to Metrc. The CPA must then trace tax liability report to the tax payments made to treasury.

1. P1 – a questionnaire the CPA must inquire of management regarding employees, benefits, banking, and lease agreements. 

2. P2 – testing of revenue, which consist of randomly selecting sales transactions from Metrc and tracing those transactions to corroborating evidence. (sample size is determined based on revenue).

3. P3 – testing of disbursements, which consist of randomly selecting disbursements from the general ledger and trancing those transactions to corroborating evidence. (sample size is determined based on revenue). Additionally, the CPA must trace total disbursements per the general ledger to a trial balance or financial statement for completeness. 

4. P4 – The CPA must obtain a vendor listing from management and determine the 10 top vendors based on dollar amounts. The CPA will then randomly select 5 of the top 10 vendors to test. A minimum of 12 transactions must be tested for each vendor and if there are less than 12 transactions for a vendor then all transactions must be tested. 

5. P5 – the CPA must complete a questionnaire related to payroll then obtain 941s and compare the gross wages and tax liabilities to the general ledger. The CPA must then trace those amounts to the bank statement or cash log to evidence payment. 

6. P6 – Distribution testing for each equity holder. This consists of tracing distributions on the general ledger to corroborating evidence. (more emphasis on the shareholders with 2.5% ownership or greater).

7. P7 – the CPA should inquire of management for any licensing agreements that were effective at any time during the reporting period. Then the CPA should select 25% of the agreements to test. Testing should include tracing disbursements pursuant to the agreement to corroborating evidence. 

8. P8 – the CPA should inquire of and obtain from management a list of all agreements that provide management or any other type of service necessary for the operation of the licensee. The CPA must then select 25% of the agreements and trace services provided per the agreement to corroborating evidence (payment terms, amount paid to services provider, etc.).

9. P9 – Testing of excise tax by obtaining quarterly filings reported to Michigan Department of Treasury and tracing amounts to Metrc. The CPA must then trace tax liability report to the tax payments made to treasury.

10. P10 – The CPA should obtain a listing of all independent contractors receiving non-employee compensation. Order these payments from largest to smallest then randomly select 5 contractors receiving payment and trace to underlying 1099 tax documents. 

11. P11 – The CPA should obtain sales tax filings for the reporting period and trace these amounts to Metrc and the POS system. The CPA must then trace total liability reported to Treasury to the liability payment. 

Both the medical and adult-use advisory bulletin issued by the MRA provides a template the CPA must follow as well as a schedule of due dates based upon the licensee’s initial licensure date. 

DA Advisory Group has been in constant contact with the MRA on this process and has made suggestions that increase practicality of the procedures and have since been implemented. We believe the requirement will be constantly fine-tuned, and along with licensees and other professionals in the industry, we plan to attend workshops put together by the MRA that will designate what is required from licensees. 

The MRA takes these reports extremely seriously, and in many cases levies fines for those reports that are late or full of deficiencies / exceptions. As of now, it is not clear on how fines are determined, but licensees do have a chance to have some of these fines waived depending on the circumstances. 

It is crucial that you deal with a CPA in the industry to prepare this report and has experience in the preparation of these annual financial statement reports. DA Advisory Group has prepared dozens of these annual financial statement reports and works directly with the MRA to prepare and improve testing procedures. 

In addition to the MRA Annual Financial Statement Report specialization DA Advisory Group is recognized for, our company can also be found on the MRA's website - in the Business Resource Directory, among other professional cannabis service providers.