Article: Jnl of Accountancy – Serving cannabis clients: Understand the risks

As cannabis continues to make its way into the mainstream marketplace, state governments are increasingly legalizing and regulating it for medical or recreational use. The legal cannabis, or marijuana, marketplace represents a projected $21.7 billion industry in 2021, according to cannabis data analytics firm BDSA, with an additional $47.8 billion in illicit spending.

Despite its significant size, the industry poses challenges for CPAs, said Ron Seigneur, CPA/ABV, a founding partner of Colorado firm Seigneur Gustafson, LLP.

“Even as marijuana becomes mainstream in many states and municipalities, it remains a thorny issue because the Controlled Substances Act, enacted in 1970 under the Nixon administration makes it a federal crime to grow, distribute and use it,” Seigneur said.

Seigneur, along with Jessica Velazquez, CPA, managing partner at Indiva Advisors of Las Vegas, will discuss the legal and ethical ramifications of representing clients dealing in cannabis during a session on ethics, practice management, and risk management in cannabis at the AICPA & CIMA Cannabis Industry Conference, scheduled Nov. 8–9 in Las Vegas and also available live online.

“As the state-legal, regulated part of the marijuana industry grows, providers will need CPAs to help them with tax issues, attestation issues, and valuation issues,” Seigneur said. “In terms of ethical considerations and risk management, it’s still something that is illegal federally under the CSA [Controlled Substances Act] of 1970.”

Theoretically, a CPA can still be accused of aiding and abetting under the Controlled Substances Act, he warned.

To date, the federal justice department has not started prosecuting CPAs or attorneys who work with state-legal, regulated cannabis clients if they are licensed in a state where it’s legal and regulated, but “they could if they choose to,” Seigneur said.

Seigneur and Velazquez offer some advice for CPAs working with cannabis clients in states and municipalities where marijuana is legal.

Understand the product

Before opening a cannabis practice area, it is important to understand the differences between the products that are derived from the cannabis plant family — marijuana and hemp. In the United States, the level of THC defines the difference between agricultural grade hemp and marijuana, Velazquez said. THC is the substance that contains psychoactive properties.

“In 2018, the U.S. Farm Bill developed criteria that defines hemp as any substance that contains less than 0.3% of THC,” she said. “You can produce hemp in all 50 states as long as it contains less than the federal THC limits.”

Plants exceeding the 0.3% THC limit are considered marijuana and remain illegal federally under the Controlled Substances Act, she added.

Practice due diligence

It is important to work with only licensed marijuana operators, Velazquez said. Due diligence starts with engagement letters.

“Make sure your engagement letters are appropriately written to clearly describe your scope of services and include provisions requiring your client to affirm it is operating legally under applicable state laws,” she said. “Certainly, you don’t want to be caught up in a relationship with a nonlicensed operator.”

Due diligence should include obtaining copies of your clients’ licenses and working with your insurance carrier to manage risk.  Also, understanding the regulatory and compliance framework in your cannabis clients’ states will go a long way toward mitigating your own risk, she said.

Know the applicable laws

Currently, recreational marijuana is legal in 18 states, but in some of those states, only a few municipalities have sanctioned it, Seigneur said. It is critical for CPA advisers to fully comprehend the jurisdictional rules at the federal, state, and local levels.

“Even in the states where marijuana is legal, you can’t always operate within some jurisdictions, so you must make sure you know which cities and counties in a particular state have authorized it, and what the regulatory landscape is in each jurisdiction,” he said.

Beware of handling cash

Because the marijuana industry is illegal under the federal Controlled Substances Act, financial transactions are usually made in cash, including payments to professional service providers, including CPA firms.

Very few financial institutions service accounts associated with cannabis businesses, and certainly federally chartered banks do not. Because of that, there is a lot of cash flowing through the industry, Velazquez said.

“And cash, in and of itself creates opportunities for bad actors to do unethical things,” she added.

She advises CPAs to maintain an elevated level of skepticism when working with cannabis clients that have no banking and handle cash. “That includes making sure you’re asking the right questions around discrepancies or anomalies that you encounter when you’re performing your services,” she said. Check to see if cash controls and standard operating procedures exist and if they are followed.

Also, a reconciled cash count and review should be performed periodically (physical cash on hand = cash per accounting records) with a minimum two-person review.

Read more at. https://www.journalofaccountancy.com/news/2021/nov/serving-cannabis-clients-risks.html

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