Business leaders in the cannabis industry know the importance of keeping good records. From regulatory compliance to key metric analytics, cannabis companies, in particular, depend on accurate business data to maintain successful operations.
Routine audits are a part of this process, ensuring that the financial records of a cannabis business are a fair and accurate representation of the transactions they claim to represent.
Audits generally fall into one of 3 categories: external audits, internal audits, and IRS/Compliance audits. Cannabis businesses performing external/internal audits gain powerful insight into their operations, ensuring businesses maximize readiness for inevitable IRS and regulatory compliance audits when they occur.
Here, we’ve identified multiple benefits to cannabis business managers that result from external/internal auditing, helping companies:
Because some investors require regular financial audits as a part of their investment agreements, a solid record of routine audits helps secure potential funding. Particularly as larger and more sophisticated investors continue to expand in the cannabis market, including cannabis industry-specific private equity funds, these stakeholders will want to see external audit results before committing to an investment.
Preparing for an external audit can seem like a daunting task. However, by following best practices for audit readiness, cannabis companies can streamline the process to be as smooth and painless as possible.
It is important to note that not all external audits are equal: depending on the company’s specific needs (i.e., whether it is publicly traded or not), cannabis companies may need to meet different reporting requirements. Despite this difference, the best practices for audit preparation remain the same. By following these proven methods, cannabis companies can ensure they are ready for any type of audit they may be subject to.
The following cannabis audit readiness best practices can help you to ensure your next external audit is completed as efficiently and effectively as possible:
1. Active preparation – One of the biggest complaints made by third-party auditors is the lack of audit preparation from companies. Companies often expect third-party auditors to clean up their books and records for them, or they fail to provide auditors with all the information they need. “You have to separate assistance from auditing,” says Deborah Lambert, a partner of Johnson Lambert & Co. in Bethesda, Maryland, and chairwoman of the American Institute of Certified Public Accountants (AICPA) auditing standards board. “Too often we get in there, and the client has things that aren’t reconciled or account analysis that isn’t done.” Once a cannabis company decides what audit is best for them and has the specific standards in hand, active audit preparation should immediately begin. Don’t wait until the last minute.
2. Management commitment – From Tyler Williams, VPO at ASI: “It is essential to the entire cannabis safety and quality system to have commitment from top-down. Without this, the site will not get the resources (people, equipment, money, time, etc.) they need to pass a third-party audit. Management commitment is so important that it is often seen as its own section in most modern audit standards.”
3. Create a to-do list – Companies should use an audit checklist or standards list to create time-based to-do lists for audit readiness. Separating standards by what needs to be done annually, semiannually, quarterly, monthly, and daily will help companies identify the tasks that need to be completed before an audit, how often to perform these tasks, and when they need to be performed.
4. Teamwork and delegation – Successful audit preparation cannot be completed by one person. Audit prep should be a team endeavor with qualified multidisciplinary team members that perform clearly defined tasks. Assembling a team and delegating to-do list tasks ensures that audit preparation is streamlined and thorough.
5. Training – Training staff for the third-party audit is an essential step for adequate preparation. Staff should know what part of the audit applies to them, and they should be prepared to answer auditor questions.
6. Conduct internal audits – Conducting internal audits is often a requirement for businesses and helps them prepare for external audits. Using the third-party audit checklist as a blueprint for internal audits, companies can ensure they meet the standards applicable to them.
Having your cannabis operation’s books, business data, and other records clean, accurate and up to date is critical to avoid surprises if and when an auditor walks onsite. In addition to the best practices above, you should rely on ERP software solutions to help maintain audit readiness. ERP and Accounting software solutions are essential items in the audit preparation toolkit and should be fully utilized as a part of the preparation process.
As your cannabis company grows or you decide to welcome future investors, business audits can become more complex and even include inventory, supply chain, internal controls, and more. Not only will having processes in place reduce waste and drive down the costs associated with an audit, operators are also able to minimize the audit’s business disruption and look more compelling to potential investors.