Cannabis Audits: Best Practices and Red Flags

Cannabis Audits: Best Practices and Red Flags

Cannabis businesses, due to their highly regulated nature, are subject to frequent audits to ensure compliance with state laws, financial regulations, and, in some cases, federal guidelines. Proper audit preparation and execution are crucial for businesses to maintain their licenses, avoid penalties, and safeguard their reputations.

The best practices for cannabis audits include maintaining comprehensive documentation, using compliant financial reporting systems, conducting internal audits regularly, and ensuring full transparency with regulators.

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Cannabis businesses, due to their highly regulated nature, are subject to frequent audits to ensure compliance with state laws, financial regulations, and, in some cases, federal guidelines. Proper audit preparation and execution are crucial for businesses to maintain their licenses, avoid penalties, and safeguard their reputations. The best practices for cannabis audits include maintaining comprehensive documentation, using compliant financial reporting systems, conducting internal audits regularly, and ensuring full transparency with regulators.

These measures help businesses stay compliant and be prepared when an external audit occurs.

Best practices also involve strict inventory management and adherence to seed-to-sale tracking regulations, which monitor the cannabis product from cultivation through sale. Another critical aspect is ensuring that taxes are accurately calculated and paid, as cannabis businesses face higher tax burdens under IRS Code 280E, which limits deductions. Financial institutions that serve cannabis-related businesses (CRBs) should also regularly audit their clients to ensure compliance with Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) requirements.

Best Practices:

  1. Comprehensive Documentation: Ensure that all business transactions, from financial records to product sales, are meticulously documented and easily accessible.
  2. Seed-to-Sale Tracking: Use compliant tracking software to monitor cannabis from cultivation to sale, adhering to state laws and ensuring transparency in the supply chain.
  3. Internal Audits: Conduct regular internal audits to identify potential compliance gaps, financial discrepancies, or operational inefficiencies before external auditors arrive.
  4. Tax Compliance: Ensure accurate reporting and payment of taxes, especially in relation to IRS Code 280E, which applies to cannabis businesses and restricts business deductions.
  5. Vendor and Employee Background Checks: Conduct regular due diligence on vendors, suppliers, and employees to minimize the risk of illicit activity within the business.

Red Flags in Cannabis Audits:

  1. Inconsistent Inventory Reporting: Any discrepancies between actual inventory and what is recorded in the seed-to-sale tracking system can indicate theft, loss, or poor recordkeeping practices.
  2. Cash Mismanagement: Many cannabis businesses operate heavily in cash due to limited banking access, which increases the risk of theft, fraud, or tax evasion if not properly managed.
  3. Non-Compliant Financial Records: Failure to maintain accurate, compliant financial records can lead to significant fines or even the revocation of a cannabis license.
  4. Missing or Incomplete Licenses: Operating without the proper licenses, or with expired licenses, can trigger severe penalties during an audit.
  5. Lack of BSA/AML Compliance for Cannabis Banks: For financial institutions serving CRBs, failure to file Suspicious Activity Reports (SARs) or conduct regular account monitoring for high-risk clients can lead to fines and regulatory action.

Are you interested in more than one of our webinars? Consider a membership to maximize your benefits and education with the ACB. For one flat price, you get year-long access to our full content library AND our Cannabis Banking Professional Professional Certification!

Meet the Instructor

Erin O’Donnell – Co-Founder Association for Cannabis Banking

Erin O’Donnell, Founding Partner of the Association for Cannabis Banking, Co-Founder of BankersHub and Co-Founder and former CEO of Bankerstuff, oversees product innovation and education.

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