As more states legalize cannabis for medicinal and recreational purposes, so too grows the need to understand the nuances of serving clients in the cannabis industry.
Cannabis industry clients present all of the same risks as clients in other industries, coupled with risks unique to this growing industry.
CPAs who work with cannabis industry clients must construct rock solid risk management practices. The guidelines must be rooted in stringent client acceptance and retention criteria, detailed engagement letters, and high documentation standards. A deep understanding of applicable state and federal regulations regarding the industry is also required.
Here we will discuss the benefits of serving this emerging industry, the inherent risk involved, and the best risk management practices for managing clients in the marijuana industry.
Reasons to work with marijuana-related businesses and professionals
Including the cannabis industry on your client list is a great way to expand your practice. The industry is in its infancy and relies heavily on legal, financial, and accounting professionals. Public opinion polls show a growing acceptance of the industry. As of November 2018, 33 states have legalized medicinal marijuana use and 10 states have legalized recreational marijuana.
Cannabis clients are not without risk
Because cannabis is still classified as a Schedule 1 illegal substance under federal law, there are risks to CPA firms that service clients in the industry. If CPAs are not diligent with their risk mitigation procedures with cannabis clients, they are exposed to:
- Criminal prosecution
- Civil recovery liability
- Ethical violations of professional boards and associations
Firms that work with marijuana-related businesses must also consider the potential damage to their reputation, especially if serving other clients who oppose it. While cannabis-based businesses are becoming more accepted, you may alienate other clients who are opposed to the industry. While these risks may seem drastic, proper risk mitigation techniques can reduce the likelihood of these damages.
Practice basic risk management on the intake
Good risk management is based on avoiding claims and lawsuits and having insurance protection in place if trouble arises. CPAs should practice quality risk management with all of their clients, but the need is particularly strong with cannabis-related businesses. Thorough intake interviews offer CPAs the first line of defense when it comes to professional and legal liability.
CPA firms should thoroughly vet potential clients with a well-established intake procedure. An intake interview gathers information about the client and informs the client of your services.
The best interviews are conducted in person with the principals of the company. Look for them to demonstrate a thorough understanding of local and state laws governing the cannabis industry, whether they have sought legal advice, and the short and long-term goals of their company.
Although it has since been rescinded, the Cole Memorandum offers valuable guidelines for marijuana businesses. Make sure the potential client adheres to each aspect of the Cole Memo to minimize trouble with law enforcement.
At the very least, the client should:
- Have measures in place to prevent minors from accessing sales
- Comply with state laws
- Have no business dealing on federal property
- Have no contact or engagement with a criminal enterprise
A good intake interview will help to limit any surprises down the road. Complete both background and social media checks on the clients. You may also ask for banking records and copies of their SOPs.
Detailed engagement letters are among the most useful risk management tools
Along with thorough intake, detailed engagement letters are among the most accessible and helpful risk management tools available. An engagement letter should detail the scope of your services and define precisely the nature of the work you are completing for the client.
For example, the engagement letter should specify if you are providing a 280E analysis or assisting with financial projections.
For starters, include the following:
Fees, collection, and a stop work clause: Include your schedule of fees and collection terms in the engagement letter. Also, outline a stop work clause and the circumstances under which it would become effective. For example, your stop work clause may come into play if there is nonpayment of fees, if there is non-adherence to the Cole Memorandum, or if the partner relationship in their company deteriorates.
Dispute resolution: Include a process for dispute resolution. Arbitration or third-party mediation will protect the confidentiality of both parties and should be standard in your engagement letter.
The changing climate of the marijuana industry
CPAs continually find themselves on the edge of changing industries and regulations. Whether you choose to dive in and service the cannabis industry or remain focused on other clients is up to you. Either way, McGowan helps protect your firm from liability risks with the comprehensive CPAOnePro liability insurance package. If you would like to learn more about working with clients in the marijuana industry, consider watching this detailed CPA/Marijuana webinar or contact our experts.