CPAs with Clients in the Marijuana Industry Need to Consider Risks
On Nov. 8, voters in nine states will consider ballot initiatives to legalize marijuana – a move that could create new businesses that will need CPA services. However, conflicting federal and state laws mean that CPAs have to carefully consider the risks of providing services to these businesses. The AICPA spoke with Stan Sterna, vice president for Aon Insurance Services, the national administrator of the AICPA Professional Liability Insurance Program, and Mike Komoll, assistant vice president of professional service claims for CNA, the underwriter of the AICPA Program, to discuss key considerations for CPAs providing services to the expanding marijuana industry.
Which states are considering legalizing marijuana in November, and why might CPAs be interested?
Sterna: Five states – Arizona, California, Maine, Massachusetts and Nevada – will vote whether or not to legalize recreational marijuana, while four states – Arkansas, Florida, Montana and North Dakota – will consider legalizing medicinal marijuana. In the 26 states and jurisdictions where marijuana is already sold legally, businesses in this industry have increasingly sought out accounting and tax services. CPAs in any states that pass marijuana initiatives next week will likely start seeing similar requests, which makes sense when you consider the size of the industry.
The market is projected to exceed $7 billion in 2016, and could exceed $44 billion by 2020. In its 2014-15 fiscal year, Colorado collected $28 million more in revenue from marijuana taxes than it did from alcohol taxes. With that as a backdrop, it is not surprising that there are growth opportunities for all kinds of professional services, including an increased need for accounting services. Of course, CPAs also should consider the potential risks involved in working with businesses in this industry.
If a state has legalized marijuana either medically or recreationally, why does a CPA still need to consider potential legal risks for providing services to a marijuana business?
Sterna: While marijuana is considered “legal” to some degree in more than half of the states, it remains unquestionably illegal at the federal level. Under federal law, any entity that supports illegal activity or knowingly accepts fees derived from illegal sources arguably engages in federal racketeering and stands in violation of a host of federal laws. This presents obvious risks for banks, financial institutions, insurance companies and accounting firms.
At the same time, a U.S. appeals court ruled in August that the federal government cannot prosecute people who grow and distribute medical marijuana under state laws – a decision that rested in part on the fact that Congress has banned the Department of Justice from spending money in ways that prevent states from implementing their own medical marijuana statutes.
With the dichotomy between state and federal laws – and even sometimes within the federal government itself – CPAs are looking at how they can mitigate risk. Professional liability insurance is a key part of that. CPAs need to know what is specifically included and excluded in their policies.
If a CPA firm chooses to offer services to a business in the marijuana industry, could this impact coverage with CNA?
Komoll: Generally, the profession or business of an insured’s client is not relevant to our coverage determinations.
How would CNA respond to a claim that arose due to a CPA providing services to a marijuana-related business?
Komoll: If a professional liability claim or an inquiry arises under the AICPA program, coverage will be considered on a case by case basis, according to the facts of each claim, the relevant policy terms and conditions, as well as applicable laws, regulations and professional association guidelines. The provision of such services will be reviewed within this framework.
What other steps do you recommend a CPA take to help mitigate risk?
Sterna: A CPA should adhere to the standard client selection process. They should have an engagement letter that details what services are to be provided, what services will not be provided and how much those services will cost. The CPA should obtain a management representation letter in which the principals of the marijuana-related business clearly say that they understand state law requirements and that they intend to fully comply with those requirements at all times. The CPA should also document all work and communication with the client, even if the communication takes place in an informal setting.
We also recommend that the CPA inquire as to whether the marijuana business has conducted criminal background checks of its employees, and, if so, review those checks to ensure there are no past drug or fraud convictions.
In addition to these steps, the CPA should also check with their state board of accountancy to determine if the board has issued any guidance for licensees.
How have state boards of accountancy been responding to the issue?
Sterna: Only eight state boards of accountancy have issued official guidance thus far: Arizona, Colorado, Connecticut, Florida, Maryland, Nevada, Oregon and Washington. For the most part, each of those state boards has said that providing accounting services to state-legal marijuana businesses is not itself an act discreditable, and that those boards will not pursue independent disciplinary action against a licensee solely for providing such services. However, a board could pursue disciplinary action against a licensee found guilty of a criminal act, and state boards are recommending that CPAs consult with their legal counsel to discuss all possible risks.
Where else can CPAs find more information on risk control related to providing accounting services to marijuana businesses?
Sterna: CPAs should review the AICPA whitepaper, An Issue Brief on State Marijuana Laws and the CPA Profession, and other resources available on a webpage the AICPA has dedicated to the issue.
This information is provided for general informational purposes only and is not intended to provide individualized business, insurance or legal advice. You should discuss your individual circumstances thoroughly with your legal and other advisors before taking any action with regard to the subject matter of this article. Only the relevant insurance policy provides actual terms, coverages, amounts, conditions, and exclusions for an insured.
Lindsay Patterson, Senior Communications Manager-State Regulatory and Legislative Affairs, American Institute of CPAs.
Marijuana courtesy of Shutterstock.