insight magazine

Ethics Engaged | Fall 2019

Weeding Through the Ethics of Serving Cannabis Clients

As Illinois eyes capitalizing on cannabis, CPAs have much to consider.
Elizabeth Pittelkow Kittner VP of Finance, GigaOm

With Governor J.B. Pritzker’s signature turning HB 1438 into law, effective January 2020, the sale and purchase of cannabis for recreational use in Illinois by adults ages 21 and older will be legal. Economically speaking, this law could be game changing for the state—and for CPAs.

Marijuana Business Daily estimates Illinois may see up to 295 stores selling cannabis by 2022, potentially generating $2.5 billion in annual sales. Considering the state’s taxes on cannabis products—10 percent tax on cannabis flower or products with less than 35 percent THC concentration; 20 percent tax on cannabis-infused products; 25 percent tax on any product with a THC concentration greater than 35 percent—Illinois could see a nice windfall. (Fellow INSIGHT columnist Keith Staats, JD, went further into the state’s cannabis tax policy in his spring 2019 column, “Weighing the Taxes on Legal Weed.”)

Beyond taxation, a legal cannabis industry in Illinois is bound to create several new businesses—all of which will need strategic business advice. Therefore, it is no surprise that one big question among Illinois CPAs is how they can ethically support the cannabis industry. After all, being licensed in Illinois to legally grow, distribute, or retail cannabis does not change the fact that doing so remains federally illegal under the Controlled Substances Act.


In her May 2019 Journal of Accountancy article, “Providing Services to Cannabis Clients,” Illinois CPA Society board member Deborah K. Rood, CPA, outlined some of the risks CPAs should consider before or while serving cannabis businesses:

• “Federally insured banks may not accept deposits from federally illegal enterprises because of potential money-laundering or aiding-and-abetting charges. As a result, cannabis clients deal primarily in cash, increasing the risk of both unreported revenue and defalcation, which increases a CPA’s professional liability risk, irrespective of the service provided to the business.

• Cannabis businesses may have limited access to the U.S. judicial system, including the bankruptcy process. Cannabis businesses face high operating costs, and many struggle financially or fail. While state courts may be accessible, the client’s ability to discharge or restructure debt is limited. Investors and vendors who lose money in a cannabis venture may seek recovery against the firm.

• The Sec. 7525 tax preparer-client privilege may not apply to cannabis clients. If the client is under investigation, the CPA may be placed in the awkward position of being required to testify against that client.

• Where cannabis is legal, states subject cannabis businesses to unique and complex regulations. CPAs servicing cannabis clients should generally understand a state’s regulatory system in order to assess a client’s regard for applicable law. Clients who disregard their legal obligations pose an integrity threat to the CPA.

• Multiple taxing authorities may impose taxes or fees on the product. With so many returns to prepare, the likelihood that a return could be audited or that the CPA could make an error or omission increases.

• Operating cash flow needs may take precedence over payroll tax and estimated tax payment obligations, which could result in penalties. Clients may blame the CPA for not advising them of their tax obligations.”


Part of a CPA’s duty is to protect the public interest. As cannabis businesses have a rising impact on our economy and society beyond investors, CPAs supporting these businesses must hold them accountable to the existing regulations. In fact, Illinois’ Administrative Rules supporting the state’s initial medical cannabis program effectively mandated that dispensaries retain CPAs, as they must engage in and submit annual audits to the Illinois Department of Financial and Professional Regulation (IDFPR) compiled and certified by an auditor or CPA.

According to former IDFPR chief prosecuting attorney and administrative law judge, Louis R. Fine, who is now a Chicago defense attorney, accounting boards in many states with established medicinal or recreational marijuana programs have largely concluded that “providing services to a state-legal marijuana enterprise is not in and of itself problematic or a basis for disciplinary action.”

As more CPAs and CPA firms serve the growing number of cannabis businesses across the country, it is inevitable that more professional standards and professional issues for working with cannabis businesses will arise.

For now, it is unclear how providing services to cannabis businesses will be viewed if an allegation comes before the Illinois CPA Society Ethics Committee or the AICPA Professional Ethics Executive Committee (PEEC) since cannabis sales continue to be federally illegal, and helping cannabis businesses may be technically viewed as a violation of federal law. Sections,, and in the AICPA’s bylaws require the AICPA to sanction a member who is found guilty of a crime with a punishment greater than one year or a member who has been sanctioned by a state board of accountancy. As of July 2019, the AICPA Ethics Division has not received any referrals from any state board of accountancy for actions regarding marijuana cases and was not aware of any state boards of accountancy that have acted against a CPA for providing services to a cannabis business.


Since cannabis sales are illegal at the federal level, the scrutiny of cannabis businesses is much higher. A medical marijuana dispensary owner-operator in Oregon was sentenced to jail time in 2018 for failing to file income tax returns for his business and individual tax returns for income received from his business.

Certain tax rules apply to cannabis businesses that do not apply to others. For example, Internal Revenue Code Section 280E states, “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by federal law or the law of any state in which such trade or business is conducted.” Since the federal government considers cannabis a controlled substance, this code must be applied, and cannabis businesses should pay tax on their gross income.

Simply put, cannabis businesses are more likely to be reviewed by the federal government on both the tax and audit sides due to their complexities. Therefore, CPAs and their firms will likely also be under greater scrutiny. For that reason, CPAs must become experts in this field and manage the risks appropriately if they want to serve cannabis clients. For practitioners performing audits, thoroughly document the going concern considerations of any cannabis business as this documentation will help to prove sustainability in a business that has more difficulty with regulations and banking relationships. As a CPA providing any services to cannabis clients, properly use an engagement letter and adequately document your positions for tax and audit reports.

The CPA profession is still largely a self-regulated profession, and we want to sustain this self-regulation by maintaining high levels of standards and integrity. As a CPA, adding cannabis to your practice areas may be profitable but you should consider the risks, understand the potential ethics concerns, and protect your liability. Operate your practice with high ethical standards and encourage any cannabis clients you serve to do the same. Both you and your clients should consult legal counsel and your professional liability insurance company for additional help. If you are considering this business niche, think about engaging in a further discussion with your profession’s ethical bodies.

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  1. Ben Shapiro | Nov 19, 2019
    Oy vey!

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