Have big dreams of going public? Then the stakes are much higher for you! And depending on the outcome, a qualified audit opinion could crater your dreams of ever going public.
Everything from the financial operations to the management of your business will have to be included in the audit.
When conducting an audit our team reviews the income statements, balance sheets and POS data. In addition, we hone in on specific details such as, inventory counting procedures, cash logs, and managing your cap table.
Mess up one of these small or larger items and you could end up with a qualified audit opinion…and that’s not qualified in a good way!
We cover the common issues cannabis companies face when undergoing an audit that can lead to a qualified audit opinion.
What To Expect with an Audit?
What does an audit look like? Essentially, it’s a team of people reviewing all your financial statements and the supporting document. In addition, all systems and processes in place that generate the supporting information.
Ultimately, once the audit is complete. The auditor is responsible for issuing an opinion on the quality of the financial statements and the overall health of the business.
Types of Audit Opinions
The most common type of opinion is an unqualified opinion. These opinions are issued if the financial statements of the company being audited are presumed to be free of any material misstatements.
On the opposite end of the spectrum, you can have adverse opinions. An adverse opinion is given when issues were uncovered during the audit that resulted in material misstatements. This is imperative to note for the operator since it could affect the decision making process. After receiving an adverse opinion, a company will need to go through another audit of its financial statements. This can cost a lot of time and money!
A qualified opinion is commonly considered to be a middle ground between an unqualified and adverse opinion. And in this instance, the auditor’s opinion relays a fair financial presentation, but with the exception of a specified area.
Disclaimer of Opinion
Lastly, there are times when an auditor needs to issue a disclaimer of opinion. This is generally due to their inability to complete the audit as a result of missing records or insufficient cooperation from prior management.
Now, let’s take a look at qualified opinions and why they are more likely to happen with cannabis business audits than in other industries.
What can trigger a qualified opinion?
As we previously covered above, a qualified opinion tells an investor that nearly everything with the financials looks good, except for one specific area. As an operator, you want to be sure you minimize issues as to not raise concerns in multiple areas of your business and financials. Issues detected in multiple areas of the business could result in an adverse opinion, ultimately leading to another audit.
There are many common issues our experts come across when working with cannabis businesses. In this section, we review the main causes we see that can trigger a qualified opinion.
Inventory Count Not Done At Year-End
In order to close out your annual books cleanly, it’s necessary to complete an inventory count on the last day of the year. In some cases, the final inventory data can be reconstructed, ie. the operator completes the count the following week or month. This is only viable as long as the incoming and outgoing inventory data (purchases and sale of goods) is still available.
But, if there is no data, or if the data wasn’t kept up to date, then there is no reconstruction available. Therefore, this leaves your cannabis operation sitting in qualified opinion territory.
Inability to Confirm Cash Balances
Everyone knows cannabis is a cash heavy business! That’s why it requires rigid standard operating procedures to assure all cash that flows through the business is accounted for.
Material cash balance differences are a huge red flag and could reflect embezzlement, theft, or simply just poor operations. These major cash issues typically require a qualified opinion.
Switching Systems with No Backup
Say you started with one POS system, and then moved over to another provider later on. If you failed to back up all the necessary data you may be unable to PROVE the money you made.
This can definitely be detrimental to your business if you get audited by the IRS. In addition, it will really kill your dreams of going public since it generally represents a material error on the side of the business.
That’s why it’s important to plan ahead of time and have the right team in place to prevent these issues from becoming problems in the future. Our accounting experts recommend having a data room on dropbox or other secure drive that stores all of your important documents including, raw POS backup data, contracts, cash logs, and more.
Interested in Going Public?
We can help! To learn more about the audit process and going public, reach out to our team of financial experts at GreenGrowth CPAs. We are here to help your cannabis venture through any level of the accounting, tax filing, or business cycle.
We employ several financial programs to assist the company with its fiscal responsibilities, including tax planning and compliance, outsourced CFO support, audit preparation, tax controversy support, and much more.
For recommendations and assistance with tax planning and accounting services, schedule a free consultation or contact us at 1-800-674-9050.