Dude, where’d the money go? Cash fraud is rampant among cash-based businesses, including those in the cannabis industry.
Cannabis market and legality
Cannabis corporations and medical marijuana have flourished as a business despite the efforts by some to squash it. While medical marijuana has been legal in California since 1996, it is still illegal at the federal level. Colorado has probably received the most press; however, 10 states have fully legalized cannabis and no prescription is required to purchase it, (with many more permitting medicinal use). What used to be a cottage industry has become mainstream and quite lucrative—think edibles and infused beverages with celebrity endorsements. The industry is projected at billions of dollars in size with strong growth worldwide, but with high overhead, complex compliance requirements, and stiff penalties, it isn’t an easy way to make money. Still, as states legalize use, they create an instant industry—an industry that also needs business advice and services.
Cannabis industry issues
Many of these smaller businesses are new at compliance with taxes and regulations, and they need advice on how to run a business well, maintain adequate books and records, and determine what to do with their money. The industry is still highly cash oriented, which lends itself to fraud and some banks are afraid to become involved with the cash. There is a concern about losing federal insurance on accounts as a result of the difference in legality between state and federal laws. There are some safe harbors for banks available, but it remains an ongoing issue for businesses in this industry, and the accountants who serve them. (For those concerned with the ethics of providing services, the AICPA maintains a list of state board positions.)
Cash fraud and tips on preventing it
One of the things that plagues cash-based businesses like these, particularly smaller businesses, is fraud. The fraud is usually perpetrated through cash theft via skimming, larceny, or in some cases, where funds are spent without the owner’s permission. Not that most cash-based businesses don’t have cash on hand, but physical security of cash is highly problematic in these businesses. Skimming, where the entries never enter the books because the cash is taken beforehand, is one way fraud occurs.
Another is collusion with customers so perhaps they pay less than is required. To prevent skimming, organizations may use video surveillance, cash receipts, detailed inventory control procedures, or something even as simple as ratio analysis.
Larceny is the intentional taking of cash without the owner’s consent or agreement of the owner. A larceny scheme may occur any time an employee has access to cash, but most occur from either incoming cash, cash on hand, or from the bank deposits.
These types of schemes may be uncovered through careful analysis of journal entries made to the cash accounts and review of the register receipts. Segregation of duties is one of the primary controls to prevent cash larceny. Mandatory vacations and surprise cash counts can be really useful as well. Finally, fraudulent disbursements are where money is spent without authorization.
Although there are several types of schemes, because these are primarily cash businesses, we’ll focus on register disbursement schemes. Register disbursement schemes typically are tied to fictitious refunds or voided sales or discounts. Careful examination of the documentation around any of those transactions and clear segregation of duties are critical in preventing these types of concerns. These are just a few of the schemes involved in misappropriation of assets.