On July 23, 2021, the Arizona Department of Health Services (AZDHS) issued a draft exposure on updated marijuana operator license renewal requirements. While their publication is still unofficial, it is important to note one of the specific requirements related to license renewals that remains intact: the requirement to get a financial statement audit as a precursor to renewal. Read the following excerpt from subsection R9-17-308 (full text can be found here):

Unless the dispensary is a dual licensee that has notified the Department according to R9-17-324(A)(2) that the dispensary has begun operating on a for-profit basis and provided a valid marijuana establishment license number according to subsection (1)(c):

a. A copy of an annual financial statement for the previous two years, or for the portion of the previous two years the dispensary was operational, prepared according to generally accepted accounting principles; and

b. A report of an audit by an independent certified public accountant of the annual financial statement required in subsection (3)(a);

Many AZ license holders will be affected by this small line of text in an otherwise lengthy read. If you have never been through a financial statement audit before, there is much more to it than creating supporting schedules for your financial statements.

What is a Financial Statement Audit?

Considering that many AZ license holders will be affected by this requirement, it is essential to understand what is required from a company under a financial statement audit.

A financial statement audit is not the same as an IRS audit.

IRS audits and financial statement audits have two very different objectives. An IRS audit is intended to verify the information contained within an income tax return. The IRS agent may or may not be a CPA but is always employed by the US Department of Revenue. Whatever the IRS auditor determines as a result of the audit may increase or decrease taxable liabilities.

By contrast, a financial statement audit determines whether the operating financial statements of a company can be considered fairly presented in accordance with Generally Accepted Accounting Principles (GAAP). The financial statement auditor signing off on the audit decision is required to be a CPA and employed by a registered CPA firm. It is important to note that tax accounting and accounting in accordance with GAAP are two entirely different basis of accounting. Thus, a business owner may pass an IRS audit and fail a financial statement audit (or vice versa).

For further discussion regarding audit requirements, see my previous blog here.

Why do I need help?

A financial statement audit requires 3rd party verification of recorded balances.

Understandably, if business owners were allowed to provide internally created supporting documentation for their numbers, every company would pass their audits. To avoid this conflict of interest, financial statement auditors require 3rd party verification to support recorded balances. This support can come in many forms, such as bank statements provided directly by your financial institution or complex schedules showing detailed calculations behind adjustments related to accounts such as inventory. Some support is straightforward to collect, while others are difficult and time-consuming. Depending on operational complexities and how organized your company is (or is not), simply collecting all the needed support can be a full-time job. Bringing in temporary, experienced assistance during the audit period can dramatically reduce the stress and distraction to your internal team, who still need to perform their day-to-day responsibilities.

Auditors want to see information in a specific way.

Even if you readily collected all the support for your numbers, the chances are that support is not in a format conducive to audit efficiency. What often happens during a financial statement audit is that the information requested is provided to auditors in a massive data dump. The auditors are then left to dig through mountains of support files without a roadmap of how that support ties back to the financial statements. That support generally also has an abundance of information that does not relate to the audit requests and can raise additional audit questions unnecessarily. This can add weeks, if not months, to the audit period. Working with an audit liaison, such as those at Rebel Rock, allows that individual to review, prepare, and provide audit support in the format that reflects precisely what the auditor needs. This not only speeds up the audit completion but also prevents the auditor from gaining irrelevant information, resulting in further audit testing for no added value.

Many errors can be identified and corrected before an audit begins.

Errors in financial statements happen all the time and can often be easily corrected without much ado. However, significant errors identified by an auditor need to be corrected and communicated to management, the board of directors, lenders, investors, and any number of other interested parties. Explaining to your board or C-Suite that you have a significant restatement of historical financials is never a good look. If the restatement is large enough, lenders may choose to call debt, and investors may lose confidence in management. Audit readiness procedures can prevent such occurrences before they happen. The team at Rebel Rock consists of many former auditors who know precisely how auditors design test procedures and what types of balances create the most issues. In this way, any potential errors can be identified and corrected well before the audit begins.

Audits can be scary, but they do not have to be

Whether this is your first time considering an audit or you have experienced many, it never hurts to bring in a second set of eyes and a lot of assistance. The suggestions above are just a small subset of the many ways the team at Rebel Rock can assist during the audit process. If you are considering the need for a financial statement audit to renew your license, don’t wait! Contact the professionals at Rebel Rock to schedule a free consultation today!