A public relations pitch recently found its way in my inbox with the subject line: “Meet the ‘dope’ accounting pros reshaping the cannabis sector.” The title of the email did its job; it grabbed my attention.
The pitch goes on to say:
Wrought with confusing laws and regulations, steep taxes and countless other financial hoops, the road to a successful cannabis business is anything but easy, leaving CEOs with an abundance of accounting problems that are unique only to this nascent—and partially illegal—industry.
Growers and dispensaries face an ever-increasing list of compliance concerns, banking issues and federal tax limitations, and legally licensed cannabis companies are being shut down, and/or facing large penalties—after having invested hundreds of thousands of dollars—due to poor accounting practices.
Closely watched by the regulators, these companies require complex, accurate accounting in order to remain compliant and audit ready.
That’s where DOPE CFO comes in.
As it turns out, two CPAs founded Bend, Ore.-based DOPE CFO: Andrew Hunzicker, a longtime CFO who has worked in the cannabis industry for the past four years and was runner-up for Portland Business Journal’s CFO of the Year in 2017—the first CFO from the cannabis industry ever nominated for the award; and Naomi Granger, a former Big 4 accountant who has more than 12 years of experience in both public and industry accounting.
According to Hunzicker and Granger, DOPE CFO is a complete do-it-yourself “accounting practice in a box” training program, including templates and tools, designed to teach accounting professionals, such as CPAs, bookkeepers, controllers, and CFOs, how to build a cannabis accounting practice or to add cannabis accounting expertise and services to their existing business.
The training business launched in January 2018 and now has 60 students in 25 states, Hunzicker said.
“DOPE CFO was formed out of a need for cannabis accounting information,” Hunzicker said in an email to Going Concern. “I built my information for the training program—QuickBooks- and Excel-ready chart of accounts, cost accounting workpapers, month-end close tie-out system, etc., from the ground up as big accounting is not in the space. Accountants started coming to me asking for help. I was answering a lot of questions for free and people wanted my information and workpapers.”
Granger added: “Working with Andrew, I discovered that DOPE CFO was more than just an accounting program—it was a movement; it’s a lifestyle. We have spoken to hundreds of accountants and they all want the same thing: freedom. DOPE CFO gives accountants a business that allows them to work remotely and charge what they are worth.”
In an interview with Going Concern via email, Hunzicker and Granger talked a little bit more about their business partnership, what common mistakes cannabis CEOs make, and why the cannabis industry presents a huge opportunity for accounting professionals, among other things:
Going Concern: Did you both know each other before starting DOPE CFO? If not, how did this business partnership happen?
Naomi Granger: We both invested in a high-ticket accounting training program and we met there. Many of the students in that program wanted Andrew’s help with entering the cannabis niche. In fact, we have many students from that course in our program.
GC: What types of clients does your business serve?
Andrew Hunzicker: We have two businesses: Ancor Advisors, which serves cannabis clients in all verticals—lab, farming, dispensary, extract, etc.—and our training business, DOPE CFO, which serves accountants and bookkeepers who want to learn how to launch or grow a highly profitable cannabis accounting firm.
GC: From an accounting and finance perspective, what are some of the unique or challenging aspects of a cannabis company that a cannabis CEO or CFO would have to understand or deal with?
Hunzicker: There are five common mistakes that cannabis CEOs make:
1. Neglecting compliance: Many businesses that have evolved from the black market are going from an unregulated market to one of the most regulated in the U.S. This, combined with the fact that many companies include every vertical (e.g., farming, processing, manufacture, retail), adds complexity and many layers of regulation—from the city, county, state, and federal levels. License requirements and federal law require compliance with all laws or a company can face steep penalties or revoked licenses.
2. Building quality offerings without focusing on building a quality company: High-quality product is only the start. If you don’t have quality accounting, tax, finance, compliance, risk management, and corporate/board/legal practices, your valuation plummets for any investment, loan or exit, and your risk of failure rises.
3. Failing to understand the value of accounting: Big, and many midlevel, accounting firms do not serve the industry while cannabis is federally illegal. Because legal cannabis is the fastest-growing industry in the U.S., there is a significant lack of day-to-day accounting supervision at many companies. Not to mention, the complexity of accounting required by the IRS and states is anything but easy, and most cannabis businesses are using untrained, unreviewed bookkeepers to enter transactions—many of whom are not trained in accrual, GAAP, or cost accounting. Most lack accounting degrees or the CPA designation and simply do not have the knowledge to account correctly for these entities.
4. Ignoring market conditions: For instance, in late 2017, there was a supply glut of flower in Oregon—prices dropped and purchases by dispensaries sharply decreased. As a result, many farms were closed or put on the market at pennies on the dollar. Meanwhile, several grow startups still had plans to invest large sums of money starting from scratch without investigating what might be available for sale. Because cannabis startups go under constantly, CEOs and investors should wait to pick up premier assets on the cheap.
5. Failing to plan for worst-case scenarios: While it’s fairly easy to predict yield or volume, and prices at the top end might stay stable, it’s harder to predict if you can actually sell large volumes of product at good pricing. The field is loaded with competitors, many with the same plan: increase the yields and move lots of product. Though some will be able to, many won’t. CEOs should consider if they are well-capitalized to sustain long periods of low cash flow.
GC: With cannabis companies being so heavily dependent on cash management, and with many financial institutions being reluctant to serve the cannabis industry, is there banking relief for these businesses on the horizon? What are some of the risks they face?
Hunzicker: Yes, cash management is huge, as banking is hard to find. However, many states do have a banking solution. For example, Oregon has Maps Credit Union that banks most cannabis companies in the state. California is working on a statewide banking solution as well.
I’ve already mentioned some of the risks, but compliance is very important: state laws, IRS, and accounting, plus cash and inventory management and management of cash flow, as net margins are razor thin due to IRS Section 280E taxes.
This is on everyone’s radar, including Treasury Secretary Steve Mnuchin, who realizes having this much cash in system promotes fraud and crime, and reduces taxes coming to the government.
GC: There’s a statistic on the DOPE CFO website that zero big accounting firms serve cannabis companies. What do you think is preventing a mainstream public accounting firm from taking on cannabis clients?
Hunzicker: Actually, as of now, I think a couple of non-Big 4, bigger firms have dipped their toes in the cannabis space, but the vast majority, including the Big 4, are waiting until cannabis is federally legal. I’ve been told their insurance carriers will not allow them to serve the cannabis industry until it is federally legal.
GC: Would you advise a CPA who is thinking of starting an accounting practice to focus on the cannabis industry? What does the opportunity landscape look like?
Hunzicker: Definitely yes! It’s the perfect storm: fastest-growing industry in the U.S., thousands of new companies being formed this year and forward, most accounting is not yet in the space, and cannabis accounting is complex within four sub-verticals—farming, chemical manufacture, food production, and retail—plus multi-entity structures; GAAP/accrual accounting and cost accounting; and investor reporting, consolidations, intercompany transactions, and cash/inventory management.
The fact is, you need solid accounting in your corner if you are a cannabis CEO, but most simply have QuickBooks-trained bookkeepers who have very little GAAP or cost accounting knowledge or skills. They had nobody before now to train them in the accounting needed.
GC: Are you worried about the federal government’s intervention into the cannabis industry? What risks does that pose to your business, and how do you manage those risks?
Hunzicker: We follow the AICPA’s guidance, as well as each state’s guidance; each state has an accountancy board where accountants can check information about serving cannabis companies. To date, we know of zero providers to cannabis—electricians, attorneys, accountants, bookkeepers, marketers, plumbers, lighting companies, labs, and on and on—that have faced any trouble simply for serving the cannabis industry. I feel we are rapidly moving to federal legalization; it’s the one nonpartisan issue the politicians and the public agree upon.
GC: DOPE CFO’s website states that legally licensed cannabis businesses are being shut down or are facing large penalties and fines due to poor accounting practices. What have you seen as the main cause or causes of a cannabis business not having its books in order or having messy accounting?
Hunzicker: It takes a year or two for both the states, many of which are understaffed, and the IRS to actually get out and check compliance—both in operations and accounting. But in Colorado, the first recreationally legal state, that is now happening and in Oregon as well.
Cannabis companies can be shut down for many reasons—everything from not paying their excise taxes, to selling to underage minors, to having a fence that is too short at a farm. One company in Bend is being shut down because they only had 30 days of security camera backup instead of the required 90 days. The IRS will be issuing many penalties, fines, interest, etc., and one firm, Adherence Compliance, estimates 70% of cannabis tax returns are incorrect and based on poor or nonexistent cost accounting.
GC: Is there anything else you’d like to add in closing?
Granger: Because of all these issues Andrew has mentioned, our students are in a perfect position to jump into this industry and establish themselves as experts while it is still a new and exciting frontier. You don’t have to be an expert marketer; there is a huge gap that needs to be filled. You can mess up completely and still land a client. You don’t have to be a CPA—both Andrew and I are CPAs and we can tell you, cannabis accounting is not on that exam. You just have to be passionate about accounting, be passionate about helping these companies with their complex needs, and be ready to learn.