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Cannabis Industry Clients: What CPAs Should Know About Risk Management

Every year more states are legalizing medicinal and recreational cannabis.  The growing cannabis industry means new client opportunities for CPAs, but with it comes the need to understand the nuances of serving this growing industry. 

Cannabis industry clients come with all the same risks as clients in other industries but have an added layer of risks that are unique to the industry.

If you’re a CPA or accounting profession working with cannabis industry clients, take extra care in constructing your risk management practices. The foundation must be built on strict client acceptance and retention criteria, detailed engagement letters, and exceptional documentation standards.  Understanding applicable state and federal regulations regarding the industry is a must.

Let’s take a look at the benefits of serving the growing cannabis industry, the risks involved, and the best risk management practices for managing these clients. 

Why work with marijuana-related businesses and professionals? 

The cannabis industry provides an excellent opportunity to expand the clientele for your practice. This newer industry relies heavily on legal, financial, and accounting professionals. Opinion polls show a growing acceptance of the industry among the public. As of November 2018, 33 states have legalized medicinal marijuana, and ten states have legalized recreational use.   

The risk of working with cannabis clients 

Even though the industry is booming, cannabis is still classified as a Schedule 1 illegal substance under federal law. If you’re not diligent about your risk mitigation procedures, you could be exposed to: 

  • Civil recovery liability 
  • Criminal prosecution 
  • Ethical violations from boards and associations 

Firms choosing to work with marijuana-related businesses must also take into consideration possible damage to their reputation, especially if they have other clients who oppose it. With proper risk mitigation techniques, CPAs can reduce the likelihood of suffering these types of damages.

Basic risk management intake processes 

The principles of sound risk management are based on avoiding claims and lawsuits and having insurance in place if trouble presents itself. Thorough intake interviews give CPAs the first line of defense when it comes to avoiding liability problems.

Firms need to thoroughly vet potential clients with a well-established and proven intake procedure. A good intake interview will gather information about the client and inform the prospective client how your services work.  

Conduct interviews in person. Check to see if the potential client can demonstrate a thorough understanding of local and state laws governing the cannabis industry. Ask if they have legal representation and find out what their short and long-terms goals are for their company. 

At a minimum, the client should:  

  • Have measures in place to prevent minors from accessing sales 
  • Comply with state laws 
  • Have no businesses on federal property 
  • Have no engagement with criminal enterprises 

You should complete background and social media checks on clients. Always ask for banking records and copies of their SOPs. 

Why detailed engagement letters are your friend

A detailed engagement letter is one of the most accessible and helpful risk management tools available. An engagement letter should detail the scope of your services and define in a precise way the nature of the work you will be providing for the client.  

Include your fee schedule, collection terms, and a stop-work clause in the engagement letter.  The stop-work clause should outline the circumstances under which it would become effective. For example, nonpayment of fees may trigger the clause. 

Dispute Resolution – Include a process for dispute resolution in the letter. Third-party mediation and arbitration will protect the confidentiality of both parties.  

CPAs continually find themselves working in growing industries that have rapidly changing regulations. If you’d like to learn more about working with clients in the marijuana industry, contact our experts