How to Prepare for a Cannabis Financial Audit in New York
New York’s cannabis market may be young, but regulatory enforcement is growing fast—and financial audits are becoming a key part of oversight. Whether triggered by a routine check from the Office of Cannabis Management (OCM) or an investigation by the IRS, cannabis financial audits are not if—they’re when.
For dispensary owners, an audit can expose you to steep fines, tax penalties, license suspension, or even criminal charges if discrepancies are discovered.
Here’s how to stay ahead of the curve by making audit readiness part of your monthly workflow—not a last-minute scramble.
1. Understand Who Might Audit You (and Why)
As a licensed cannabis retailer in New York, you may be audited by:
- OCM, to review operational and regulatory compliance
- New York State Department of Taxation and Finance, to verify sales and excise taxes
- The IRS, focusing on 280E compliance and underreported income
- Investors or lenders, conducting due diligence before funding
Each auditor will look for slightly different red flags—but financial records are always at the center.
2. Organize Your Chart of Accounts for Cannabis
Dispensaries must use industry-specific accounting, with categories that separate:
- Plant-touching vs. non-plant-touching costs
- COGS-eligible vs. non-deductible expenses (per 280E)
- Inventory, shrinkage, and waste adjustments
- Segmented revenue by product type (flower, edibles, etc.)
Use a cannabis-friendly accounting system like QuickBooks Online with custom templates or cannabis ERP tools that integrate POS and seed-to-sale tracking.
3. Maintain Daily Inventory Reconciliation
Your product inventory is one of the most sensitive audit areas. Be ready to show:
- Daily logs of product received, sold, destroyed, or returned
- Adjustments tracked in both your POS and seed-to-sale software
- Monthly physical inventory counts and reconciliation reports
Discrepancies—especially repeated ones—can raise suspicion of product diversion or tax evasion.
4. Track Cash Movement with Detailed Logs
If your dispensary handles cash (due to banking limitations), auditors will want:
- Daily cash drawer reports
- Deposit records matching sales reports
- Cash transportation logs
- Video or physical documentation of cash handling procedures
Keep cash handling SOPs on file and train employees to follow them consistently.
5. Keep Payroll and Time Tracking Records Accurate
Labor costs are often misclassified. Make sure:
- Staff who handle inventory are tracked separately (COGS-eligible)
- Admin and sales staff are coded correctly (non-deductible under 280E)
- Time tracking software matches payroll reports
- Employee roles and responsibilities are documented
Be ready to justify salary allocations in your tax return or audit response.
6. Ensure Tax Compliance at Every Level
You’ll need to show proof of:
- Filed quarterly and annual tax returns
- Payment of state excise and sales taxes
- 1099s and W-2s for contractors and employees
- Cannabis-specific 280E tax planning documentation
Late or inaccurate filings are among the most common audit triggers.
7. Create an Audit-Ready Documentation Folder
Maintain a centralized audit file that includes:
- Licensing documents and renewals
- Operating procedures (SOPs)
- Lease agreements and vendor contracts
- Inventory and accounting policy manuals
- Monthly reconciliations and financial statements
Digital cloud-based folders (with backups) make audits smoother and less stressful.
🔍 Final Thoughts: Be Audit-Ready Before the Letter Arrives
Cannabis audits aren’t just about catching mistakes—they’re about proving that your dispensary operates with integrity, transparency, and control.
GreenGrowth CPAs specializes in cannabis audit readiness. We help New York dispensaries create bulletproof financial systems, reconcile records monthly, and prepare for OCM, IRS, and investor reviews.
✍️ By Daniel Sabet, Cannabis CFO & Financial Advisor at @GreenGrowthCPAs. Daniel advises cannabis operators nationwide on finance, compliance, and strategy.
GreenGrowth CPAs: 1178 Broadway, 3rd Floor, New York, NY 10001, United States
