ontinues 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?
"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."
Also, would CPAs who render such services to cannabis clients be exposing themselves to allegations of “aiding and abetting” criminal activities? Thus far, several state boards of accountancy have issued guidance on providing services to marijuana industry businesses, and the profession is pushing remaining state boards of accountancy to provide guidance as well.
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 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 who specializes in this industry.
As part of your process in assessing “risks,” never forget your professional acts and decisions will be judged in hindsight. Therefore, if your firm decides to service cannabis clients (or any other higherrisk clients), be extremely attentive to the following rules in the malpractice world:
"Consider creating a crisis management plan (or enhancing an existing one) to manage the firm's potential reputational risks."
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 tarnish CPAs reputations.
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 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.
- 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. It should be based on the potential consequences of servicing cannabis clients and 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.