Cannabis Regulatory Agency CRA AFS

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 Cannabis Regulatory Agency (CRA) (Formerly 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 Michigan Cannabis Regulatory Agency (CRA) (Formerly Michigan Marihuana Regulatory Agency (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 Michigan Cannabis Regulatory Agency (CRA) (Formerly Michigan Marihuana Regulatory Agency (MRA)) to be prepared by a CPA licensed in the state of Michigan. The Michigan Cannabis Regulatory Agency (CRA) (Formerly Michigan Marihuana Regulatory Agency (MRA)) report consists of several procedures that the CPA must perform. These procedures are designated by the Michigan Cannabis Regulatory Agency (CRA) (Formerly Michigan Marihuana Regulatory Agency (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 Michigan Cannabis Regulatory Agency (CRA) (Formerly Michigan Marihuana Regulatory Agency (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 Michigan Cannabis Regulatory Agency (CRA) (Formerly Michigan Marihuana Regulatory Agency (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 Michigan Cannabis Regulatory Agency (CRA) (Formerly Michigan Marihuana Regulatory Agency (MRA)), the licensee will be issued a certificate of completion.

R1 – Testing of revenue, the CPA must obtain management’s description of the standard operating procedures pertaining to cash and revenue reconciliation. For each license, the CPA must obtain a reconciliation of total revenue per Metrc to total revenue per POS (if applicable) and total revenue per the general ledger. The CPA must inquire of management and obtain support for any discrepancies noted.

E1 – Testing of lease agreements, the CPA must obtain copies of all leases for real property. The total payments recorded in the general ledger are compared to the amount expected per each respective lease agreement. The CPA must inquire of management for any over/under payments.

E2 – Testing of financing agreements, the CPA must obtain copies of all agreements for financing (loans, promissory notes, debt financing, royalty financing, equity financing, debt instruments, etc.) with an individual or entity excluding financial institutions and supplemental applicants. The total payments recorded in the general ledger are compared to the amount expected for each respective agreement. The CPA must inquire of management for any over/under payments.

E3 – Testing of management agreements, the CPA must obtain all contracts between the licensee and another party for the provision of management or other services that would allow the other party to exercise control or participate in management of a license. The total payments recorded in the general ledger are compared to the amount expected for each respective agreement. The CPA must inquire of management for any over/under payments.

E4 – Testing of licensing agreements, the CPA must obtain all contracts for use of intellectual property to another party in effect at any time in the reporting period. The total payments recorded in the general ledger are compared to the amount expected for each respective agreement. The CPA must inquire of management for any over/under payments.

E5 – Testing of service vendors, the CPA must obtain a vendor listing from management detailing total payments to service vendors during the reporting period. The CPA will identify the top 20 service vendors, based on total amount paid during the reporting period. From the top 20, 10 vendors are selected for further testing. A minimum of 12 transactions must be tested for each vendor and if there are less than 12 transactions then all transactions must be tested.

E6 – Testing of other vendors, the CPA must obtain a vendor listing from management detailing total payments to other vendors (not tested in E1 – E5) during the reporting period. The CPA will identify the top 10 other vendors based on total amount paid during the reporting period. From the top 10, 5 vendors are selected for further testing. A minimum of 12 transactions must be tested for each vendor and if there are less than 12 transactions then all transactions must be tested. Note that sample size increases based on number of licenses held.

D1 – Ownership, the CPA must obtain a listing of equity owners and their respective ownership interest during the reporting period. The CPA will then identify distributions made through equity during the reporting period and trace to corroborating evidence. Emphasis is placed on owners of more than 2.5% or 5% depending on the entity type.

D2 – Employee, the CPA will complete a questionnaire specific to employees receiving compensation in excess of 10% of gross profit during the reporting period and employees receiving bonus compensation. The CPA may need to include the bonus/incentive program with the AFS submission.

R1 – Testing of revenue, the CPA must obtain a detail of total revenue by customer for the reporting period. The CPA will then identify the top ten revenue sources and complete further testing for three of the top ten revenue sources. For the three revenue sources a minimum of 12 transactions must tested and if there are less than 12 transactions for a revenue source then all transactions must be tested. Note that sample size increases corresponding to gross income.

E1 – Testing of lease agreements, the CPA must obtain copies of all leases for real property. The total payments recorded in the general ledger are compared to the amount expected per each respective lease agreement. The CPA must inquire of management for any over/under payments.

E2 – Testing of financing agreements, the CPA must obtain copies of all agreements for financing (loans, promissory notes, debt financing, royalty financing, equity financing, debt instruments, etc.) with an individual or entity excluding financial institutions and supplemental applicants. The total payments recorded in the general ledger are compared to the amount expected for each respective agreement. The CPA must inquire of management for any over/under payments.

E3 – Testing of management agreements, the CPA must obtain all contracts between the licensee and another party for the provision of management or other services that would allow the other party to exercise control or participate in management of a license. The total payments recorded in the general ledger are compared to the amount expected for each respective agreement. The CPA must inquire of management for any over/under payments.

E4 – Testing of licensing agreements, the CPA must obtain all contracts for use of intellectual property to another party in effect at any time in the reporting period. The total payments recorded in the general ledger are compared to the amount expected for each respective agreement. The CPA must inquire of management for any over/under payments.

E5 – Testing of service vendors, the CPA must obtain a vendor listing from management detailing total payments to service vendors during the reporting period. The CPA will identify the top 20 service vendors, based on total amount paid during the reporting period. From the top 20, 10 vendors are selected for further testing. A minimum of 12 transactions must be tested for each vendor and if there are less than 12 transactions then all transactions must be tested.

E6 – Testing of other vendors, the CPA must obtain a vendor listing from management detailing total payments to other vendors (not tested in E1 – E5) during the reporting period. The CPA will identify the top 10 other vendors based on total amount paid during the reporting period. From the top 10, 5 vendors are selected for further testing. A minimum of 12 transactions must be tested for each vendor and if there are less than 12 transactions then all transactions must be tested. Note that sample size increases based on number of licenses held.

D1 – Ownership, the CPA must obtain a listing of equity owners and their respective ownership interest during the reporting period. The CPA will then identify distributions made through equity during the reporting period and trace to corroborating evidence. Emphasis is placed on owners of more than 2.5% or 5% depending on the entity type.

D2 – Employee, the CPA will complete a questionnaire specific to employees receiving compensation in excess of 10% of gross profit during the reporting period and employees receiving bonus compensation. The CPA may need to include the bonus/incentive program with the AFS submission.

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 Michigan Cannabis Regulatory Agency (CRA) (Formerly Michigan Marihuana Regulatory Agency (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 Michigan Cannabis Regulatory Agency (CRA) (Formerly Michigan Marihuana Regulatory Agency (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 Michigan Cannabis Regulatory Agency (CRA) (Formerly Michigan Marihuana Regulatory Agency (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 countless of these annual financial statement reports and works directly with the Michigan Cannabis Regulatory Agency (CRA) (Formerly Michigan Marihuana Regulatory Agency (MRA)) to prepare and improve testing procedures. 

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