If you run a Professional Employer Organization in Texas, you already know the Texas Department of Licensing and Regulation is not a department you want to get on the wrong side of. TDLR sets the rules for every licensed PEO in the state, and one of the biggest rules is this: every year, you have to submit an audited financial statement that shows your business is financially sound. Miss it, submit something incomplete, or send in a report that doesn’t check all the boxes, and your license renewal gets held up.
This guide walks you through exactly what TDLR expects from your PEO audit, why the requirements exist, and how to make sure your financial statement is ready to be filed without any back and forth.
What the Texas Department of Licensing and Regulation Requires?
Every PEO licensed in Texas operates under Chapter 91 of the Texas Labor Code, which lays out the licensing rules for professional employer organizations (formerly known as staff leasing companies). One of the core requirements under Chapter 91 is that your PEO must submit audited financial statements as part of both new license applications and annual renewals.
The audit has to be:
- Prepared by an independent Certified Public Accountant (not your in-house bookkeeper or accountant)
- Done in accordance with Generally Accepted Accounting Principles (GAAP)
- Structured as a full audit, not a review or compilation
Complete with balance sheet, income statement, cash flow statement, and note disclosures
That last point matters. TDLR is very specific – they want an audit. Reviews and compilations do not satisfy the requirement. Neither does a set of internally prepared financials, no matter how detailed they are.
The Working Capital Rule - What Counts, What Doesn't
This is where most PEOs run into trouble.
TDLR requires your audited financial statement to show positive working capital. Working capital, put simply, is your current assets minus your current liabilities. If that number is positive, TDLR sees you as financially healthy enough to keep serving Texas client companies and their employees. If it’s negative, you have a problem – but not one that can’t be solved (more on that below).
What counts as current assets and current liabilities isn’t always obvious. Things like related-party receivables, prepaid workers’ comp premiums, and unearned revenue all get scrutinized. A good PEO auditor will know how these items should be classified under GAAP and how TDLR reviewers actually read the audit report. Getting these classifications wrong is one of the most common reasons TDLR asks for clarification after you submit.
Why Company Tax Returns Don't Satisfy the Requirement?
This trips up newer PEOs all the time. If you’re used to submitting your tax returns to prove financial standing, that’s not going to work here.
TDLR is explicit – company tax returns prepared by a CPA are not accepted to document working capital, even if the returns show your PEO is profitable and has money in the bank. The reason is that tax returns are prepared for tax purposes, not to give an independent opinion on your financial position.
Only a full audit does that. If your CPA has only ever prepared your tax returns, they may not be set up to perform the level of independent audit work TDLR requires. This is worth asking about before you assume your current accountant can handle it.
The 15-Month Rule - Timing Your Audit Correctly
TDLR has a specific timing rule that catches a lot of PEOs off guard. Your audited financial statement must show your company’s working capital on a date not more than 15 months before TDLR receives your license application or renewal.
In practice, that means if your PEO’s fiscal year ends December 31 and you’re renewing your license in late Q1 the following year, you’re fine. But if you delay and let too much time pass between your fiscal year end and your submission, TDLR can reject the audit as too old and require you to run another one covering a more recent date.
This is why it’s worth working backward from your renewal date and starting the audit process early. A rushed audit is a stressful audit, and a late audit means license delays.
What Happens If Your Working Capital Is Negative?
If your audit shows negative working capital, don’t panic. TDLR allows PEOs to cover working capital deficiencies through approved security, including:
- A guarantee from a qualified guarantor
- A letter of credit from a financial institution
- A surety bond
- Other security acceptable to TDLR
You still need to submit the audited financial statement showing the deficiency. The security is provided alongside the audit, not in place of it. The audit itself must be complete and accurate – TDLR is not going to accept an incomplete audit just because you’ve provided a bond.
A CPA experienced with TDLR PEO audits will know how to present a working capital deficiency in the audit report in a way that pairs cleanly with your cure mechanism. This coordination matters more than most PEOs realize.
Full License vs Limited License Requirements?
Texas issues two types of PEO licenses, and both require audited financial statements.
The full license is for PEOs providing services broadly in Texas. Full license holders undergo extensive background checks and must renew annually.
The limited license is for out-of-state PEOs assigning 50 or fewer employees to work in Texas. The limited license does not require the same level of background check, but it does still require the same audit standards – a full audit by an independent CPA showing positive working capital, submitted annually.
There’s no waiver process for the audit requirement regardless of which license you hold. If you’re licensed by TDLR, you’re getting audited.
Common Reasons TDLR Pushes Back on Submitted Audits
Not every audit that gets submitted sails through. Here are the most common issues that lead to TDLR requests for clarification or resubmission:
- Working capital calculation is unclear or not clearly presented in the report
- Note disclosures are incomplete or missing required items
- The audit date is too old (violates the 15-month rule)
- The report was prepared by a CPA not licensed in the United States
- Related-party transactions were not properly disclosed
- The audit doesn’t clearly follow GAAP presentation standards
Most of these are avoidable if the CPA doing your audit knows what TDLR looks for. The problem usually isn’t the audit itself – it’s that the CPA doesn’t have specific experience with Texas PEO submissions.
Frequently Asked Questions
A TDLR PEO audit is an independent examination of your PEO’s financial records by a licensed CPA, resulting in audited financial statements that show positive working capital. It’s required annually for every licensed PEO in Texas under Chapter 91 of the Texas Labor Code.
No. TDLR specifically requires a full audit. A review or compilation, while less expensive to prepare, does not meet the licensing requirement and will not be accepted.
No. Company tax returns are not accepted, even when prepared by a CPA. TDLR requires an independent audit report specifically prepared to express an opinion on your financial statements.
Your audited financial statement must show working capital as of a date within 15 months of when TDLR receives your license application or renewal. Wait too long, and TDLR may require a more recent audit.
You can still get your license through an approved cure mechanism such as a guarantee, letter of credit, or surety bond. You still need to submit the audited financials showing the deficiency – the security is provided alongside, not instead of, the audit.
Yes. Both full and limited license holders must submit audited financial statements. The audit standards are the same regardless of license type.
Ask if they’ve prepared audits specifically for TDLR PEO license submissions before. Any licensed CPA can technically perform the audit, but one who knows TDLR’s expectations will save you from resubmission delays.
Get Your TDLR PEO Audit Handled Right the First Time
If you’re a Texas PEO or staff leasing company looking for a CPA who knows exactly what TDLR expects, Metwally CPA PLLC prepares audited financial statements built for TDLR submission – with the working capital calculation, note disclosures, and format that reviewers actually want to see.
Fixed-rate pricing. Digital delivery statewide. Responsive turnaround so your license renewal doesn’t stall.
Mohamed founded Metwally CPA PLLC in 2020 in the Dallas-Fort Worth metropolitan area. He holds active CPA license in the state of Texas and California. Mohamed is the firm’s Executive Director. Mohamed has a Master of Science (M.S.) degree in Accounting from University of Dallas. He has extensive assurance experience in a wide variety of industries, and he also devotes considerable time consulting and working with organizations and CPA firms on internal controls, audit quality, automation, and accounting best practices. He has over 15 years of audit experience.
Prior to founding the firm, Mohamed worked for big 4 and national firms for over than 10 years in the assurance practice. Mohamed worked on private clients as well as public clients and specialized in financial services sector.
He is a member of the Texas CPA Practice Issues, Diversity and Inclusion, and Governmental Accounting and Single Audits Conference Committees of Texas Society of CPAs.
Mohamed is a member of the American Institute of Certified Public Accountants, member of the AICPA small business group, member of the American institute of Certified Management Accountants, and Texas Society of Certified Public Accountants.
