Cannabis Knowledge & Insights

Embezzlement: Spotting the Warning Signs in Your Cannabis Business

Concerned about the possibility of embezzlement? In this article and video, we discuss ways business owners can spot the warning signs of embezzlement in cannabis businesses.

So today’s topic is embezzlement and how to spot the warning signs in your cannabis company and this presentation is brought to you by green growth CPAs now cannabis is still a new market and with so much cash just changing hands during the course of doing normal everyday business it’s likely that operators will come across some type of fraud embezzlement or some type of financial misrepresentation at some point in the business now investors and co-founders should be aware that just because you know somebody personally or I’ve interacted with a certain business many many times it doesn’t mean you aren’t or won’t be deceived at some point now you want to learn how to spot the warning signs that something is amiss so in this video we’re gonna cover some warning signs that someone in your cannabis operation might be stealing or diverting cash out of the business in a deceptive way but before we do I need to let you know that the information contained in this presentation is meant for guidance purposes only and not as professional legal or tax advice and further it does not give any personalized legal tax investment or any business advice in general so what we’re gonna cover in this video is first the key signs of theft or embezzlement in your cannabis company and then what to do when things don’t add up or when you spot something that is amiss in your cannabis business operation so the first sign of theft or embezzlement now if your company has cashflow issues this could signal that there may be theft or embezzlement now it’s not uncommon for cannabis businesses to run into cash flow issues we’ve talked about this extensively however if you’re controlling costs and margins while hitting your revenue targets and you’re still experiencing cash flow issues and you need to find out where your leaky holes are within the business need to look for these types of signals to see if your cash flow issues are a sign of theft or fraud now things like does the same employee always ask to handle the cash personally and never ever let anybody else touch the cash or move the cash are there any unusually large or numerous credits being offered to a particular customer is it happening frequently also are there duplicate payments being made to any particular business or any particular individual other unexplained changes in your accounting records other updates are their scratch outs or their very messy records in that sense why are these records being updated and unexplained and lastly is there a large number of payments being made to individuals with the same name or address now we’re not talking just payroll stuff but is there a four thousand seven hundred and twenty six dollar check being sent out to an individual every month or every period or every quarter or whatever that is that you’re looking at the period of your financials you know why is that happening now it’s not uncommon to have that but just make sure that there’s a note in your QuickBooks or in your Xero of why this is happening now these questions can help you determine if an employee’s manipulating your ledger or diverting funds into their own pocket strong accounting standard operating procedures can help you spot this problem quickly and make sure that doesn’t get to something much larger later down the road secondly you need to check if your on-site cash reconciliation and records are a mess or non-existent now in many cases of embezzlement that we’ve seen in come across cash logs do not reconcile correctly against the daily POS reports and that’s point-of-sale reports your cash register now as a good standard practice 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 much bigger that’s why we say every day reconcile these things out because if you notice for three days straight that $300 is gone all right well it’s better to find it in three days instead of in 30 when the others like you know three four thousand dollars gone now in addition to reconciling your POS reports against your cash logs check your cash deposits now the deposits that you put into your on-site or your off-site safe need to tie out to the amount of cash that is coming in through your business and what’s on your cash logs if the amount of cash in your safe is consistently under the recorded amount then you have a problem on your hands and that’s not good we don’t want that we don’t want theft or diversion of cash so you can check out a recent video of cash handling best practices to learn more about how to handle these types of situations and mitigate their impact on your business we had about 10 suggestions of widely used cash handling procedures that can help mitigate the diversion of cash now if you spot a discrepancy between the cash and 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 and see if they can explain to you what’s happening and if you don’t get a satisfactory answer from either party refer to your security cameras and watch a few days worth of till until count-outs that’s where the till gets set on the table it’s being recorded and they cut off the change there’s $200 to start the till they come back in there’s four thousand seven hundred dollars in there so you want to look to make sure that that $200 in change plus whatever cash came into the business equals at a month at the end of the cash out now you may be surprised at what you see so be ready to take swift action you cannot allow people to get away with this because you’re sending a signal to the other employees that the manager or the owner doesn’t really take this seriously so when you find something amiss you need to take swift action next if you’re accounting or other records are completely disorganized or don’t match that could be a sign of theft or embezzlement now in most companies the CFO is responsible for keeping records of the finances chief financial officer so if your accounting records are totally disorganized it’s a red flag that your CFO or someone on the financial team is totally incompetent so first find someone else to do that work but worse off is that someone is trying to hide something so you want to start digging deeper disorganized records are an easy way for someone who’s stealing to cover their tracks now it’s also important that the records tie up meaning that for example on a balance sheet your assets equal your liabilities plus your owner’s equity now if the financial statements don’t tie something’s not good there now other things to look out for if no monthly P&L statements or balance sheets are being produced and ask why that’s happening if critical documents are missing such as contracts or master promissory notes then why is that if Bakke reconciliations have too many outstanding checks why is that if accounts receivables and accounts payables don’t balance or make any sense then why is that if there are too many increases in past due accounts receivable you need to look deeper into that this is called accounts receivable aging now if your accounts are getting older and older and older say they’re more accounts are becoming 30 days past two or more accounts are becoming 90 days past due and why is that and lastly if customers are complaining about having already paid a bill and then receiving a second bill then why is that happening is there someone trying to double charge so they can take that second charge and put it in their pocket you need to look deeper into that now next if you receive late tax payment notices unexpectedly something’s probably wrong now many operators treat cannabis business taxes just like their personal taxes means that they don’t take it very seriously until late payments become a worst case scenario now operators who embezzle funds from their cannabis business believe they can just take the money miss a tax payment and then make that up in their next filing now it really doesn’t work like that and the penalties associated for 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 that you own so it’s not uncommon to see an excise tax bill normally close to $200,000 now can you truly afford a 50% penalty and pay a hundred thousand dollar penalty probably not so if your finance managers said that they’re paying taxes on time make sure you check and ask for receipts now you also want to create an SOP or best practice so that tax payments are submitted early and not on the due date to mitigate any risks of late payment especially if you have to mail things in and they have to be postmarked by a certain date you don’t want someone to say oh well I got to the post office after they closed or it’s a holiday on the day it’s due and they closed up or whatever happened you want to pay these things early don’t hold on to the cash at a last minute try to pay a few days early a few weeks early if you can depending on what type of filing it is next if you observe major upgrades in an employee’s lifestyle that cannot be supported by their salary then something is probably fishy or not but let’s talk about it so say an hourly employee buys a new Tesla or a business partner buys a second home in Laguna Beach okay this is something to catch your eye now if you see dramatic changes in a colleague spending habits that aren’t supported by their income just ask about their recent purchases be intrigued by it and see how the person explains it it’s always possible if their grandmother passed away and left them some large inheritance or they had a trust or they just crushed it in cryptocurrency now it’s also possible that they’re stealing money from your cannabis operation now some common warning signs and an employee’s stealing that they go on lavish vacations or pay for a lot of guests to join them on a basic vacation or if they have a lot of new toys such as a fancy car a boat an ATV or four of them or that second home we talked about or maybe their husband or their wife or their fiance quit their job with no plans on getting a new now again these are not telltale signs that someone is stealing but they are big changes that may be worth paying attention to now the last point I want to talk about here is that if the CEO the partner or the manager makes irrational hiring decisions that they call strategic now when someone is stealing they want to surround themselves with trusted individuals to help hide their theft so watch for someone that makes hiring decisions without soliciting applications without interviewing candidates very deeply with multiple rounds of interviews or doing any sort of due diligence before expanding their team if they’re not calling any references or you know if they’re not running any background checks especially if this is a financial or fiduciary type of position that is a red flag now be keen to observe the following okay is your partner only hiring friends and family now it’s not bad to hire friends and family but is the whole team friends and family next do they fight to not fire someone who was clearly incompetent is someone just totally messing up their job duties but the person you suspect is stealing is like no no we have to keep this person on we have to keep this person on and their rationale just doesn’t make sense or are they reluctant to hire an outside accountant or consultant for anything money or financial related or is there a vendor or manager that they’re just too close to it seems like this person is more involved with that other business or with that other employee than they are with their business partners now you want to avoid any risk of nepotism and make sure your hiring decisions are based on talent and not connections or not any type of family friends type of thing this is critical to having a great operation period you need to have the right people in place to build a valuable business but also diversifying where people come from can help mitigate the risk of stealing or embezzlement or theft of cash so now that you understand some of the warning signs what do you do when things just don’t add up so what do you do if you find something that looks like embezzlement you call the police do you call your investors do you call the suspected person out immediately in front of the entire team so the first thing you should do is document all these suspicious happenings and behaviors that you are observing a simple list of things that caught your eye will do now in addition you want to create your own general ledger of money coming in and money going out of the business this can help you provide a baseline to which the faulty or disorganized transaction records can be compared to now if you’re not a numbers person this may be a little bit harder to do but if you can do this try to create your own little general ledger say all right we brought two million dollars in revenue in we put this much out in expenses we should have this much left over now that’s when you can start to compare these faulty records to next if you have the confidence in open communication with the suspected party or parties then ask them to help you better understand these issues or these discrepancies now don’t come in accusing them of anything they’ll get defensive and they may shut down you don’t want to do this 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 are they stumbling over their words are they getting flustered and frustrated or do they have rational thought patterns and it makes sense now if you still have doubts and you don’t trust what this person is saying then hire an independent accountant to run an income and expense report and then create a P&L for your business now if the person that stealing is very reluctant to hire this person that is an extreme red flag because in most cases the account or CPA that you bring in to run that PNL that you know third party stamp of approval P&L will find some things missing and ask for backup documents to reconstruct your financial records now if these records cannot be produced then your final step is to pretty much hire a forensic accounting firm to do a deep scrub of your financials and at this point you’re probably gonna want to get your investors and your lawyers involved now after the forensic accounting investigation goes on it can take weeks it could take months depending on the scale of your business now if that report comes back with some substantial evidence of a financial crime some embezzlement some of theft then you can reach out to the authorities or follow the advice of your legal team now at this point it’s really up to you what to do but you should probably follow what the advice of your legal team is you’re paying them to keep the business intact and follow their advice you’re paying for it right so hopefully this video has brought you some value and opened up your eyes and helped you to see maybe if these things are happening in your business then maybe there’s some theft or some embezzlement or some diversion of cash within the business now you need help with an accounting analysis or reconciliation or helping to create that third party P&L then please reach out to green growth CPAs via our website at green growth CPAs com or give us a call at eight hundred 676

is messy and you don’t have any theft or embezzlement it’s just bad poor record-keeping then you get on a better positive track you can keep track of those financials and steer the business in the right direction but we’ve also had the case where we found theft and embezzlement to the tunes of millions of dollars and then you really have to go with that forensic investigation to truly quantify the amount and then you proceed with whatever kind of things that the legal team wants you to do so if you need help again with that accounting analysis that PL at secondary reconciliation then reach out to us via our website at green growth CPAs com or give us a call at eight hundred 676