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Embezzlement: How to Spot the Warning Signs in Your Cannabis Company

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February 05, 2020

Cannabis is still a new market, and with so much cash changing hands during the course of doing business, it’s likely that operators will come across fraud, embezzlement, or financial misrepresentation at some point.  

Investors and co-founders should be aware that just because you know someone personally, or have interacted with a certain business many times, that doesn't mean you aren't or won't be deceived at some point.

Learn how to spot the warning signs that something is amiss. In this post, we are going to cover signs that someone in your cannabis operation might be stealing or diverting cash out of the business in a deceptive way. 

Key signs of Theft or Embezzlement

Company has cash flow issues

It’s not uncommon for cannabis businesses to run into cash flow issues. However, if you are controlling costs and margins while hitting revenue targets, then you need to find where the leaky holes are within the business.

Look for these signals to see if your cash flow issues are a sign of theft or fraud: 

  • Does the same employee always ask to handle the cash personally? 
  • Are there unusually large or numerous credits being offered to a particular customer? 
  • Are there duplicate payments being made? 
  • Are there unexplained changes in your accounting records? 
  • Is there a large number of payments being made to individuals with the same name or address? 

These questions can help you determine if an employee is manipulating your ledger or diverting funds into their own pocket. Strong accounting standard operating procedures can help you spot the problem quickly. 

On-site cash reconciliation and records are a mess or non-existent 

In many cases of embezzlement, cash logs do not reconcile correctly against daily POS reports. These POS reports must be produced every day. It’s one of the only ways to spot a small problem before it becomes something much bigger. 

In addition to reconciling your POS report against your cash logs, check your cash deposits. The deposits that you put into your on-site or off-site safe need to tie out to the amount of cash that is coming in through your business. If the amount of cash in your safe is consistently under the amount recorded, then you have a problem on your hands. Read more in our recent coverage of cash handling best practices

If you spot a discrepancy between the cash in your safe and the cash recorded, start by asking your manager to explain why the two amounts don’t match up. Then, speak to the cashiers to see if they can explain what’s happening. If you don’t get satisfactory answers from either party, refer to your security cameras to watch a few days worth of till count-ins and count-outs.  You may be surprised at what you see, so be ready to take swift action. 

Accounting and other records are completely disorganized or don’t match

In most companies, the CFO is responsible for keeping records of the finances. If your accounting records are totally disorganized, it’s a red flag that your CFO or someone on the cannabis financial team is trying to hide something. Start digging deeper: disorganized records are an easy way for someone who is stealing to cover their tracks. 

It’s also important that records ‘tie’ up, meaning that on a balance sheet, your assets equal liabilities plus owner’s equity. Other things to look for: 

  • No monthly P&L statements or balance sheets are being produced
  • Documents are missing
  • Bank reconciliations have too many outstanding checks
  • Accounts receivable and payable don't balance
  • There are too many increases in past due accounts receivable
  • Customers are complaining about having already paid a bill

You receive late tax payment notices

Many operators treat cannabis taxes like personal taxes, meaning they don’t take taxes very seriously until late payments become a worst-case-scenario. Operators who embezzle funds from their cannabis business believe they can just take the money, miss a tax payment, and make up that payment up in the next filing. 

It doesn’t work like that, and the penalties associated with not taking your taxes seriously can be quite expensive. For instance, the penalty for not paying your cannabis excise tax on time is 50% of the amount owed. It’s common to see excise tax bills of close to $200,000; can you truly afford a $100,000 penalty? 

If your finance manager says that they are paying taxes on time, make sure to ask for receipts. Create an SOP so that the tax payments are submitted early and not on the due date to mitigate any risks of late payment. 

You observe major upgrades in an employee’s lifestyle that could not be supported by their salary

An hourly employee buys a new Tesla. A business partner buys a second home in Manhattan. If you see dramatic changes in a colleague’s spending that aren’t supported by their income, ask about their recent purchases and see how the person explains it. It’s always possible that their grandmother left them an inheritance or that they crushed it in cryptocurrency. It’s also possible that they are stealing money from your cannabis operation. 

Some common warning signs that an employee is stealing: 

    1. They go on lavish vacations or pay for a lot of guests to join them
    2. They have new toys, such as a fancy car, boat, ATV, or second home 
    3. Their husband or wife quit their job with no plans to get a new one

Again, these are not telltale signs that someone is stealing; but they are big changes that may be worth paying attention to. 

The CEO/partner makes strategic hiring decisions

When someone is stealing, they will surround themselves with trusted individuals to help hide their theft. Watch for someone who makes hiring decisions without soliciting applications, interviewing candidates, or doing any sort of due diligence before expanding their team.

Be keen to observe the following:

  • Is your partner only hiring friends and family?
  • Do they fight not to fire someone who is clearly incompetent?
  • Are they reluctant to hire an outside accountant?
  • Is there a vendor that a manager is too close to?

Avoid any risk of nepotism and make sure your hiring decisions are based on talent, not connections. 

 

embezzlement-add-up

Steps to take if you suspect something

So what do you do if you find something that looks like embezzlement?  Do you call the police? Do you call your investors? 

The first thing you should do is document all of the suspicious happenings and behaviors that you are observing. A simple list of the things that caught your eye will do. In addition, create your own general ledger of money coming in and going out of the business. This can help provide a baseline to which faulty or disorganized transaction records can be compared. 

Next, if you have the confidence and open communication with the suspected parties, then ask them to help you better understand these issues.  Don’t come in accusing them of anything, especially if you’re not a numbers person. Just have them explain things to you and see how they react and what their responses are.

If you still have doubts, then hire an independent accountant to run the income and expense reports and to create a P&L for your business. In most cases, the accountant or CPA will find some things missing and ask for backup documents to reconstruct financial records. If these cannot be reproduced, then your final step is to hire a forensic accounting firm to do a deep scrub on your financials.  At this point you are probably going to want to get your investors involved.

If you still suspect that a crime has been committed, then you can reach out to authorities, but before you do that, you should reach out to your CPA and/or your attorney.

For more on how to protect your cannabis operation, check out this post: Cannabis Security 101: How to Protect Your Business

Do you need help with keeping accurate financial records for your cannabis company?  Please get in contact with our team and we can help you out today!

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Post Tags: Finance, Operations, Accounting

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