Currently, eleven states plus the District of Columbia and the Northern Mariana Islands have legalized medical and recreational cannabis while thirty-three states plus the District of Columbia, Puerto Rico, the U.S. Virgin Islands, and Guam have legalized medical cannabis. The number of states with legalized cannabis is projected to grow in the coming years (National Conference of State Legislatures 2020). However, cannabis remains illegal and classified as a Schedule I controlled substance at the federal level (Robinson 2017). Throughout the USA, there remains a dichotomy of viewpoints regarding cannabis. Some Americans believe cannabis is a dangerous drug, due to its psychoactive properties, that will lead to violence and crime and should remain outlawed (Cheon et al. 2018). Many Americans believe that cannabis is a gateway drug that will lead individuals to use other, harder drugs (Doherty et al. 2015), while a contingent of Americans see cannabis as having potential medical and industrial benefits that outweigh any danger to society (Pew Research Center 2015). Others view cannabis as less dangerous, or at least no more dangerous, than alcohol and believe the drug should be legalized for use by adults (Pew Research Center 2015). These differences of opinion continue to be debated in the legal system and, particularly, in the political arena (Pew Research Center 2015). This conflict between federal and state laws, as well as the dichotomy of viewpoints, creates the business problem addressed by this study.
Because of federal illegality, cannabis-related businesses (CRBs), even when operating legally under state laws, may have difficulty obtaining professional financial services (Sterna and Wolfe 2017). For example, CRBs face difficulty in obtaining banking services such as checking, credit cards, electronic transfers, and loans (Taylor et al. 2016). Many certified public accountants may be unwilling to provide their accounting and tax services to CRBs due to increased risks associated with the industry (AICPA 2016; Taylor et al. 2016).
Purpose of the study
The purpose of this research was to determine the perceptions of CPAs regarding the provision of accounting services to the cannabis industry in states that have legalized cannabis for recreational use. The two most mature cannabis markets are in Washington and Colorado and include producers, processors, and retailers. Both states have cannabis industries consisting of many small businesses; in fact, 42% of the Colorado market comes from “corporations that would be considered a small business by the U.S. Small Business Administration (less than $8 million for specialty retail stores)” (MPG Consulting and Leeds School of Business 2019, page 34). CPAs in Colorado and Washington were surveyed to gain information regarding their willingness to serve the cannabis industry and their perceptions regarding the ethical issues of doing so. This study was needed to determine if and why CPAs are unwilling to serve the industry. The following research questions were studied:
Will CPAs serve the cannabis industry?
Why are CPAs unwilling to provide services to cannabis-related businesses?
What do CPAs believe is the primary risk related to serving the cannabis industry?
Do CPAs believe serving the cannabis industry would create an ethical issue?
Accounting professionals likely have a myriad of reasons for not servicing the cannabis industry. CPAs may be unwilling to provide the services due to conflicting federal and state regulations which would result in a violation of federal law and potential criminal charges. CPAs may also be unwilling to provide the services for fear of violating professional ethics codes and losing their professional permit to practice which could potentially reduce or eliminate the CPA’s ability to earn a living. Some CPAs or CPA firms may elect to decline the business because of an individual moral objection to participating in the cannabis industry. Lastly, some CPAs may choose to avoid the cannabis industry due to the extensive learning required to obtain the specialized knowledge required to serve the complex, cash-intensive, and high-risk industry efficiently and effectively.
CPAs are granted a license to practice from the state(s) in which they provide services (AICPA 2016). An ethical infraction or “lack of good moral character” may cause the CPA to lose his or her license to practice (AICPA 2016, p. 11). The National Association of State Boards of Accountancy cautions CPAs to verify with their state accountancy boards as to whether providing services to the cannabis industry would constitute “an ‘act discreditable’” (NASBA 2019, para. 2). Because cannabis business violates federal law, the provision of services by a CPA related to a cannabis business could potentially be considered a violation of good moral character or an act discreditable (NASBA 2019).
State boards of accountancy have not been entirely clear in their official guidance to CPAs on the provision of services for the cannabis industry (AICPA 2016). For example, the Washington State Board of Accountancy (BOA) states that provision of services to a cannabis-related business does not constitute a violation of the BOA’s rules (Satterlund 2018). However, the Washington BOA further recommended that CPAs consider the risks associated with serving the cannabis industry and that CPAs engage an attorney for counsel (Satterlund 2018). The 2018 statement by the Washington BOA followed the March 2018 signing of the Washington State Engrossed Substitute Senate Bill 5928 which states:
A certified public accountant or certified public accounting firm, which practices public accounting as defined in RCW 18.04.025, does not commit a crime solely for providing professional accounting services as specified in RCW 18.04.025 for a marijuana producer, marijuana processor, or marijuana retailer authorized under chapter 69.50 RCW (Satterlund 2018, para. 3).
In Colorado, the BOA issued a Position Statement that indicated the CPA’s provision of services to the cannabis industry is not “specifically prohibited by the Accountancy Act” (Colorado Board of Accountancy 2015, para. 1). The Colorado Board went on to caution CPAs that this:
should not be construed: (a) as an endorsement for certificate holders to provide professional services to the marijuana industry; (b) as a statement about the feasibility of meeting applicable professional standards in providing services to the marijuana industry; or (c) as a statement about marijuana enforcement in any other jurisdiction or by any other local, state, or federal authority. (Colorado Board of Accountancy 2015, para. 3)
The provision of services to cannabis businesses may not necessarily constitute a violation of good moral character, but other issues can arise from a CPA servicing the cannabis industry (Sterna and Wolfe 2017). For example, a CPA may be judged to have “aided and abetted” or been involved in a “conspiracy to violate” the federal Controlled Substances Act or racketeering laws (Sterna and Wolfe 2017, p. 9). Participating in “dishonest, fraudulent, or criminal acts” associated with the cannabis industry may result in the CPA being exposed to criminal prosecution that could result in fines, penalties, or other discipline (Sterna and Wolfe 2017, p. 10).
New Mexico adopted a law that licensed CRBs would need to have financial statements audited by a CPA to submit to the governing authority (Chiang et al. 2019). The New Mexico Board of Accountancy (NMBOA), however, did not issue guidance to licensed CPAs indicating approval of this service, and therefore, no CPAs would do the work (Chiang et al. 2019). CPAs are strongly encouraged by the state boards that have specifically addressed serving the cannabis industry, the AICPA, and NASBA to proceed with caution and seek legal counsel when entering the cannabis industry (Chiang et al. 2019; NASBA 2019).
The findings from a 2019 qualitative study supported the belief that many CPAs are not willing to serve the cannabis industry primarily because the drug remains federally illegal (Owens-Ott 2020). However, that study found a small number of CPAs are willing to serve the cannabis industry which means that CRBs do not have to find substitutes for professional CPA services (Owens-Ott 2020). That study further determined that to competently serve the cannabis industry, CPAs need to acquire significant industry experience and have a thorough knowledge of state and local regulations, U.S. Tax Code § 280E: “Expenditures in connection with the illegal sale of drugs,” and internal controls for a cash-intensive business (Owens-Ott 2020).
In addition, CPAs may believe there is reputational risk with current or prospective clients in associating with the cannabis industry. Reputation of a firm could potentially be seen by outsiders as an indication of the firm’s quality of services (Devers et al. 2009). CPA firms may be believed to be less than legitimate based on their association with the somewhat controversial cannabis industry (Devers et al. 2009). A core stigmatized organization is one for whom outsiders have a “perceived violation of social norms,” and these outsiders may look at the organization unfavorably (Hudson and Okhuysen 2009, p.134). Current or prospective clients may avoid engaging with a CPA who works in the cannabis industry because they worry that a negative stigma may transfer to them (Hampel and Tracey 2016). Some CPAs may strategize that they are willing to accept such core stigma as part of their business as may be the case for CPA firms who specialize in cannabis clients (Hudson and Okhuysen 2009).
Because qualitative research based on interviews provides the information “filtered through the view of interviewees,” the perspectives of the participants of the Owens-Ott (2020) study may not necessarily be reflective of all CPAs (Creswell and Creswell 2018, p. 188). In addition, many of the participants in the qualitative study were found through the researcher’s professional network thus their responses might not be as “equally articulate and perceptive” as other participants might be (Creswell and Creswell 2018, p. 188). Finally, as is the case with most qualitative research, the number of participants in the Owens-Ott (2020) study was limited due to the large amount of in-depth interview data that had to be collected. To expand knowledge in this field of study and the findings of the qualitative study, this research project was initiated. Using the findings from the Owens-Ott (2020) study, this project was designed to obtain data from a larger sample size than was possible with the qualitative study.