AICPA Releases Issue Brief on State Marijuana Laws and the CPA Profession
The AICPA has recently released an issue brief on state marijuana laws and the CPA profession. The information was prepared by AICPA staff and volunteers, with input from the Colorado (COCPA) and Washington (WSCPA) state CPA societies. The issue brief gives an overview of U.S. recreational and medicinal marijuana laws, the current legislative/regulatory environment, and information for CPAs considering providing services to businesses that operate in these industries. To read the brief in its entirely, click here.
Key Facts Presented
Twenty-three states, Guam, and Washington, DC, have all passed laws allowing the use of marijuana as a medical treatment for certain conditions. Despite the fact that nearly half of the country has legalized marijuana in some form, in August 2013, the Department of Justice announced an update to its federal marijuana enforcement policy that made clear that marijuana remains an illegal, Schedule 1 controlled substance under the Controlled Substances Act of 1970, and that federal prosecutors will continue to have the authority to enforce this statute.
At the same time, the U.S. Department of Justice has said that it will focus its efforts on drug trafficking and keeping marijuana out of the hands of minors, not on prosecuting individuals who are following state laws, and that the federal government will rely on state and local authorities to address marijuana activity through enforcement of their own narcotics laws.
While almost half the country now allows marijuana to be sold for medical purposes, most state boards of accountancy have taken a “wait-and-see” approach when it comes to issuing guidance for CPAs offering services to marijuana businesses. As of May 2015, only two state boards of accountancy (Oregon and Washington State) had issued specific guidance for CPAs who may wish to provide such services. Outside of these two states, state boards of accountancy have offered little specific guidance to CPAs regarding this issue.
What CPAs Need to Know
CPAs and CPA firms need to consider several factors before deciding to provide services to marijuana-related businesses:
- CPAs should first determine how their state board of accountancy defines and applies the “good moral character” requirement, and what their board considers to be an act discreditable.
- CPAs should consider the legal and insurance risks of providing services to a marijuana-related business.
- CPAs should also consider conducting background investigations on all key principals in the business to determine if any have prior convictions related to drug issues.
- CPAs who are AICPA members must consider the AICPA’s bylaws and Code of Professional Conduct. While the AICPA Professional Ethics Executive Committee has not taken a formal position on this issue, AICPA Bylaws sections 18.104.22.168, 22.214.171.124 and 126.96.36.199 REQUIRE the Institute to sanction a member who is disciplined by a state board of accountancy or convicted of a crime punishable by more than a year.
While the law and ethical requirements remain uncertain, it is ultimately up to each individual CPA and his/her firm as to whether they are comfortable providing services to businesses in the marijuana industry.
Businesses operating in the marijuana industry are seeking both assurance and non-assurance attest services, including audits, reviews, and agreed upon procedures engagements.
CPAs wishing to provide services to these businesses must first address the issue of competency. Does the CPA have enough knowledge of the industry to plan an engagement properly? A CPA should fully understand the entity, including the legal and regulatory environment of the industry, in order to assess the risk of material misstatement — a challenge when that environment is ever-changing and unclear. In planning an audit and determining the risks of material misstatements, a CPA should consider the numerous risks associated with businesses in this industry.
The key point for tax professionals working with clients in the marijuana industry is due diligence. Because of the lack of clear guidance, CPAs should be conscientious in reviewing all available information related to standards for tax return reporting, confidentiality of client information, conflicts of interest, due diligence, knowledge of client’s error, contingent fees, and written tax advice.
CPAs who wish to provide services to clients in the marijuana industry will encounter many gray areas. However, in addition to the numerous considerations discussed thus far, there are a few more steps CPAs can take to mitigate the risks associated with taking on a client in this industry.
- A CPA should always have an engagement letter with his or her client that explains what services are to be provided, what services will not be provided, and how much those services will cost.
- The CPA should require each of the principals in the business to sign a representation letter stating that they understand the requirements of state law related to cannabis businesses and that they intend to fully comply with those requirements to the best of their ability at all times.
- CPAs should also document all work and communication with a client, even if that communication takes place in an informal setting.
- A CPA should seek out advice from colleagues that have clients in the marijuana industry to determine how they are trying to best mitigate risk.
For GWSCPA member’s reference, both DC and Maryland have some form of marijuana legalization. Virginia does not.