Managing the Risks of Serving Cannabis Clients

July 11, 2019

CPAs working with clients in the “bottles, brews and buds” industries are confronted with a myriad of issues that pose potential risks, ranging from legal and ethical dilemmas, internal control problems with cash businesses, disclosure issues, and many more. Learn more about these issues at the Bottles, Brews & Buds Conference, August 2, where CAMICO CEO Ric Rosario will discuss “Legal Liability Insurance & Licensing: The Fourth ‘B’ ... Don’t Get Burned!” 

 

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 America’s cannabis industry continues to grow: The U.S. legal cannabis market was worth an estimated $10.4 billion in 2018 and is projected to grow to about $26 billion by 2025, according to analytics firm New Frontier Data, which compiles business metrics for the cannabis industry.

This projected growth has more and more CPA firms weighing the business opportunities and risks related to expanding their practice into this emerging industry. Marijuana-related businesses are in need of the professional accounting and tax services CPA firms offer. However, at the heart of the challenge for CPAs evaluating these opportunities are the uncertainties regarding the industry’s legal standing.

First and foremost, cannabis remains a Schedule 1 substance – illegal to grow or possess under federal law. There are no guarantees that current or future administrations will continue the discretionary position that provides the industry’s uncertain foundation. This dichotomy creates ethical and moral quandaries for CPAs. For example, would rendering services (tax, accounting, consulting services, etc.) to cannabis clients be considered a lack of “good moral character” or an “act discreditable” by state boards of accountancy?

Also, would CPAs who render such services to cannabis clients be exposing themselves to allegations of “aiding and abetting” criminal activities? Thus far, eight state boards of accountancy, including the Washington State Board of Accountancy, have issued guidance on providing services to marijuana industry businesses, and the profession is pushing the other state boards of accountancy to provide guidance.

Risk Assessment

From CAMICO’s perspective, a CPA firm considering opportunities to accept marijuana business clients should adopt a risk assessment approach to evaluate the risks to their firm from serving these clients’ needs. For example, assess the risks associated with the specific client attributes (all-cash business, complexity, uncertainty, etc.) along with assessing the specific firm attributes (risk tolerance, competency, level of service choices, etc.) as you carefully consider whether these prospective clients are a good fit for your firm. As part of this risk assessment, firms should discuss and review the potential legal ramifications with an attorney specializing in this industry.

As part of your process in assessing “risks,” never forget that your professional acts and decisions will be judged in hindsight. Therefore, if your firm decides to service cannabis clients (or any other higher-risk clients), be extremely attentive to the following rules in the malpractice world:

  • Professional standards for CPAs are merely the floor — juries hold CPAs to even higher standards.
  • A CPA’s job is to advise clients of opportunities and warn them of risks.
  • CPAs are scriveners — lack of documentation is viewed as evidence of potential malpractice; jurors expect CPAs to have strong documentation, and the lack of it is viewed as not having met the “burden of proof.”
  • “Guilt by association” can impact CPAs in a dispute.

Loss Prevention Best Practices

Apply appropriate safeguards to address the added risk threats associated with cannabis clients. Best practices to follow:

  • Gain and maintain the requisite knowledge and experience to serve these clients.
  • Meet principal(s) face to face.
  • Perform background checks on all principals.
  • Insist that clients have ongoing legal representation.
  • Obtain written consent annually to interact with client’s attorney.
  • Prohibit clients from paying you in cash.
  • Document, document, document! Have a signed and detailed annual engagement letter requiring a retainer, clearly articulating scope and limits and “protective clauses” such as:
    • Client will release and indemnify you, your firm and its personnel from any claims, liabilities, costs and expenses attributable to any misrepresentation by management or its representatives.
    • Financial statements (if any) will address the going concern uncertainty.
    • Client acceptance and continuance are contingent on satisfactory discussions with client’s legal counsel – assessing client and attorney’s knowledge of, and compliance with, cannabis-specific laws.
    • You can stop work for noncompliance with payment terms.
  • Document all planning, work, consultations and communications (internal and external).
  • Obtain a management representation letter annually (regardless of type of service) that affirmatively confirms: the accuracy and completeness of client’s records; client is aware of IRC Sec. 280E ramifications; client’s understanding of, and compliance with, state laws and regulations; and all tax returns have been timely filed.

Consider creating a Crisis Management Plan (or enhancing an existing one) to manage the firm’s potential reputational risks. A crisis management plan should be based on the potential consequences of servicing cannabis clients and should include engaging with a qualified attorney and public relations firm (for incident responses), as well as specifying who will speak on behalf of your firm.

CAMICO advises its policyholders on risk management for cannabis business clients, including reviews of engagement letters for policyholders. More information about CAMICO insurance solutions and risk management programs is available at www.camico.com.

 

Duncan Will

Randy Werner

 Duncan B. Will, CPA/ABV/CFF, CFE, is Loss Prevention Manager/Accounting & Auditing Specialist

Randy R. Werner, J.D., LL.M./Tax, CPA, is a Loss Prevention Executive, both with CAMICO (www.camico.com)

 

 CPAs working with clients in the “bottles, brews and buds” industries are confronted with a myriad of issues that pose potential risks, ranging from legal and ethical dilemmas, internal control problems with cash businesses, disclosure issues, and many more. Learn more about these issues at the Bottles, Brews & Buds Conference, August 2, where CAMICO CEO Ric Rosario will discuss “Legal Liability Insurance & Licensing: The Fourth ‘B’ ... Don’t Get Burned!” Find details and register now here.

This article appeared in the summer 2019 issue of the WashingtonCPA Magazine. 

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