Forensic Accountants Provide Valuable Support to the Cannabis Industry

Enhanced efficiency and fraud detection protect your investment

The legal cannabis business has gone from prohibition to a booming market at lightning speed. In 1996 California became the first state to legalize medical marijuana with other states joining them in the 2000s. In 2012, Colorado and Washington became the first U.S states to legalize recreational marijuana. Today the legal cannabis industry generates more than $30 billion dollars annually. But challenges continue to emerge in this rapidly evolving landscape. Cannabis is a dynamic sector, where consolidation, mergers, and acquisitions require accurate business valuations. But it’s also a highly regulated industry, burdened by compliance with state-by-state regulations, licensing requirements, and exorbitant taxation, especially under IRS section 280E. Companies dealing with cannabis products can also have difficulty in accessing traditional banking, since federal law still prohibits commercial marijuana. Finally, cannabis is a cash-centric business with a highly fungible inventory, making dispensaries vulnerable to internal theft.

To meet the various challenges of the cannabis industry’s competitive environment, you need to eliminate unforced errors that lead to preventable losses. North American Forensic Accounting provides a wide range of services to help you overcome hurdles that are especially perilous to the cannabis industry. When you consult with our highly trained and experienced professionals, you receive essential services that empower you to reap the greatest reward from your enterprise.

Sale and acquisition success through accurate business valuations and Quality of Earnings Reports

Within every new, dynamic industry, consolidations, mergers, and acquisitions proliferate. The cannabis sector has already recorded several billion-dollar-plus mergers and acquisitions. We can expect such activity to continue, as business owners seek to scale and control the supply chain from seed to retail sale, and oversaturation of large multi-state operators run their course. Federal legalization, which seems inevitable at some point, could drive even more consolidation. If you participate in any such transaction, you want to achieve the best results possible, and NAFA can help.

A key component to any business sale or merger is a thorough and accurate business valuation. NAFA has ample experience conducting accurate, detailed, and reliable business valuations and quality of earnings reports across various businesses sectors, including the cannabis industry.

Helping you to recover losses from theft or business interruptions

Whether through theft, fire, flood or some other adverse event, any company can suffer devastating losses from vanishing inventory or the inability to conduct business. In some cases, business interruption insurance can aid recovery, but you must produce complete, accurate records to prove your insurable losses. Our NAFA team can perform a deep dive into your business records to reconstruct in detail your businesses circumstances before the adverse event, thus providing a reliable calculation of the lost profits and any lost assets.

If an insurer challenges your claim, the forensic accounting experts at NAFA can present a thorough report to bolster your case and provide confident testimony as expert witnesses on your behalf.

Robust litigation support for various legal controversies

Cannabis businesses can find themselves embroiled in litigation related to:

  • Personal injury, such as slip-and-fall or product related claims
  • Employment law disputes, such as discrimination and wage and hour conflicts
  • Partnership or shareholder disputes
  • Mergers and acquisitions
  • Insurance claim denial

Such litigation generally requires assessments of damages, as well as reliable business valuations. Our forensic experts have the knowledge, tools, and resources to tackle even the most complex tasks, such as wage and hour lawsuits. We provide detailed reports, and can appear as expert witnesses, giving clear, cogent testimony on all pertinent financial matters.

Internal fraud and theft risk in the cannabis industry

The cannabis industry is particularly vulnerable to internal fraud and theft due to its cash-heavy operations and high-value inventory. Employees, managers, and even business partners can exploit weaknesses in process controls and inventory tracking to perpetrate fraud. Common fraud schemes include:

  • Cash skimming — Employees pocket cash from sales without recording it in the point-of-sale system.
  • Inventory theft — Workers steal cannabis products from inventory for personal use or to divert them for resale.
  • Payroll fraud — Workers can inflated their hours worked or rate of pay. Managers can even put ghost workers on the books.
  • Embezzlement — An employee with requisite skill and opportunity can divert company funds to a personal account.

Transaction fraud falls into two basic categories:

  • Vendor fraud — Employees collude with vendors to overcharge or provide lower value product substitutions in exchange for cash (kickbacks).
  • Fake or unauthorized discounts — Front-line staff process or give unauthorized discounts to certain customers.

NAFA’s team of trained investigators can examine your records to assess how theft is occurring and how much the business has lost. We can also help you implement tighter controls to eliminate future fraud.

Strategies to reduce internal fraud risk

NAFA is determined to help our clients “build a better business” by incorporating best practices for fraud prevention, which include:

  • Strengthening internal controls
  • Enforcing segregation of duties and rotating employee responsibilities like inventory reconciliation /on-hand counts
  • Implementing surveillance and security systems in all cash-handling and inventory areas with regular monitoring
  • Requiring dual approvals for financial transactions and inventory adjustments
  • Implementing strong employee screening and monitoring processes
  • Conducting background checks on employees and key business partners
  • Behavioral monitoring to flag unusual employee activities

These services can more than pay for themselves in savings that come with eliminating fraud.

How NAFA can help cannabis businesses identify and investigate losses from fraud

Fraud flourishes where internal controls are lax. By performing a fraud risk assessment, we can show you where your risks of fraud lie, so you can make the necessary corrections to protect your company. NAFA draws on specialized training and decades of experience. We also employ FraudSeekerTM, our proprietary tool that uncovers evidence of fraud. When we find the red flags of fraud, we can perform a more thorough investigation, elucidating the facts you need to pursue a legal remedy. We also work closely with your attorneys to assemble the evidence necessary to present a compelling case for work discipline, criminal charges, and civil action to recover losses.

Contact NAFA to access forensic accounting services for your cannabis business

North American Forensic Accounting provides a range of advanced accounting services to clients in a wide array of industries. NAFA serves clients from offices throughout the United States, including in Philadelphia, Pittsburgh, New York City, Atlanta, Charlotte, Miami, and the Tampa Bay Area. To learn more, call us at 347-286-4860 or contact us online to schedule an appointment.