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
Head of Finance, International Legal Technology Association
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.
UNDERSTAND THE RISKS
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
• 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.”
CONSIDER ETHICAL IMPLICATIONS
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
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 184.108.40.206, 220.127.116.11, and 18.104.22.168 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.
MAINTAIN COMPETENCE AND INTEGRITY
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.