It seems like every week lately we read about another cannabis industry fraud. Investors are losing millions. Regulators are levying fines. The IRS, tax court and states are moving at full speed against these companies that simply lack effective management controls. In one tragic case, a cannabis business founder committed suicide after losing millions in court. It’s a lose/lose situation. I can barely keep up with reading the headlines of these disaster cases.
We recognize that a lack of experienced CPAs and business leadership in the industry, combined with the rush to cash in during this early gold rush stage, is to blame for the high number of fraudulent transactions. The industry is now growing at a rate of 60% per year with even faster growth forecast ahead.
We expect the problem will tame as the industry attracts more experienced auditors with experience in similar high risk situations.While nobody in our region has much of a track record in the newly legalized industry, I see many parallels to other cash-based industries like rural New Jersey’s farming and fishing businesses.
The best advice I can immediately offer clients is to slow down, take a deep breath, and develop a business plan with internal and external controls the same as you would in any other high risk business venture.
The best way for the cannabis industry to reduce fraud risk and other business risks is to design and implement effective management control systems just like we see in the farming and seafood industries. CPAs with experience in high risk businesses are best suited to tame the risk and bring respectability to the industry.