Financial Advisory Blog

Armanino’s Financial Advisory blog is your source for thought leadership around cloud ERP and accounting solutions and integrations. Supported by the Cloud Accounting Institute and numerous experts in cloud, finance, reporting, integration, compliance, and technology, Armanino’s Financial Advisory blog features must-read content on what’s happening in the finance industry, case studies, white papers, and much more.

March 16, 2018

Marijuana in the Workplace – Clearing the Smoke

Posted by Lisa Hagen

marijuana in the workplaceSince 1996, 29 states and the District of Columbia have legalized medical marijuana.  There are currently nine states, as well as DC, that have adopted laws legalizing cannabis for recreational purposes.  As the use of marijuana, both medically and recreationally, increases in the United States, employers should review their policies―specifically regarding drug testing, company policies and state/federal compliance.

The states with legalized use and possession of recreational marijuana have certain exemptions for workplace policies.  Employers are still entitled to maintain a drug-free workplace, as well as the right to drug test.  For those employers who do require drug testing, a positive test is only indicative that marijuana has been used at some point. However, routine tests for marijuana usage often yield false positives, as marijuana tends to stay in the bloodstream longer than other substances.

Multistate employers should look at the laws of each of the states where they employ workers.  At a minimum, employers should have clear policies included in handbooks or as a separate policy document, laying out the company’s policies (and consequences) for drug testing of applicants and employees, as well as how they will treat medical/recreational use of marijuana in the states where it is legal.  All employees should acknowledge receipt of the policy.

This much is clear: Marijuana is still illegal federally.  It remains a Schedule 1 drug and is prohibited under the Controlled Substances Act.  Legal issues around the use of marijuana must be addressed on a state-by-state basis.  There is no one-size-fits-all answer here―it’s still rather hazy.  Some employers may think that the best test is to observe employees to see if they are impaired, following up with a write-up or termination, if needed.  Due to the ease of obtaining a prescription for the medical use of marijuana, this is also risky; employers should exercise caution and seek counsel before taking action.

Educate yourself on the laws in the states where you operate.  It is always wise to seek expert advice and legal council prior to finalizing company policies.  Once the policies are in place, be sure to train managers and supervisors on how to deal with potential impairment on the job.  As long as the policy is clear, and the enforcement is consistent, none of your workers should be dazed and confused.

Learn more about the benefits of outsourcing your HR work from Armanino’s Outsourced Finance & Accounting HR team.

April 1, 2020

COVID-19 and Federal Assistance for the Cannabis and Hemp Industry

Posted by Mike Goral

Cannabis plant - COVID_19 Stimulus Package

These past few weeks have been challenging for all of us, including cannabis and hemp companies, which are no strangers to the ups and downs of market conditions. As COVID-19 has become more widespread, many states have declared these businesses “essential services” and allowed them to operate under some restrictive guidelines, including social distancing and curbside pickup.

Because of the pandemic, some of our cannabis and hemp clients are seeing sales increases of 25% to over 200%. Nevertheless, this has caused a strain on supply chains, and shelter-in-place orders have made it difficult for many workers to perform their jobs.

To help companies during these turbulent times, the federal government implemented three separate stimulus packages in March 2020. Some may assist cannabis companies, and most are available to hemp companies. Here is a summary.

Coronavirus Preparedness and Response Supplemental Appropriations Act (H.R. 6074)

The president signed this bill on March 6, 2020, and instructed the U.S. Small Business Administration (SBA) to provide capital and liquidity to firms affected by the coronavirus. The legislation provides $50 billion of low-interest loans to qualifying companies. Unfortunately, the SBA was explicit and specifically excluded marijuana businesses even if the business is legal under state law.

Hemp companies, however, are fully legal under the 2018 Farm Bill. Therefore, the limitations placed on cannabis and marijuana businesses should not apply to hemp business that are operating in compliance with federal and state rules and regulations.

Families First Coronavirus Response Act (H.R. 6201)

This sweeping legislation temporarily extends and enhances policies relating to family and medical leave for employers with fewer than 500 employees. It took effect on April 1, 2020, and has three related parts:

1. Emergency Family and Medical Leave Expansion Act

This section outlines requirements for providing ongoing paid family leave time for up to 12 weeks. Therefore, if you have employees who cannot go to work because they have the coronavirus themselves, are staying at home with children who are no longer in school, are taking care of a family member with the coronavirus, or otherwise must comply with the shelter-in-place order, you can still pay them up to 12 weeks and get reimbursed under this Act. Although the first 2 weeks are unpaid, the employee may get paid sick leave either under this law or under existing sick time policies. For the next 10 weeks, employees must receive at least two-thirds of their regular pay, up to $200 per day and a total of $10,000.

2. Emergency Paid Sick Leave Act

Similar to the Emergency Family and Medical Leave Expansion Act above, the guidance applies to employers with fewer than 500 employees and requires them to provide sick leave, which can be reimbursed. However, two caps are provided:

  • The cap is $511 per day and $5,110 total if an employee is ill or subject to quarantine, either mandated or recommended.
  • The cap is $200 per day and $2,000 total if the employee is caring for others, including family members affected by the illness or a school-aged child whose school or childcare center has been closed.

3. Payroll Tax Credits

There are payroll tax credits available to employers who provide COVID-19 related leave payments made to employees.

The application of this section to cannabis companies is a little complicated, since it is connected to the state-administered unemployment insurance programs. It’s important to note that these funds are transferred from the federal government to the state governments. Therefore, individual states have the authority to decide which industries are legally eligible to receive benefits. It is assumed that state-approved, licensed cannabis companies would qualify for these benefits.

The tricky part for cannabis companies is that the IRS will reimburse employers for 100% of the cost of paid sick leave, either through payroll tax credits and/or direct payment refunds. A tax credit would run afoul of IRC 280E and could be denied by the IRS. However, a direct reimbursement would not have the same IRC 280E limitation. More detail about these credits is still pending per the IRS’s approval. We’ll have more information once the official governance is available.

Hemp companies should be able to fully participate in all aspects of the Families First Coronavirus Response Act.

Coronavirus Aid, Relief, and Economic Security (CARES) Act

Under the CARES Act, small businesses can receive small business interruption loans to cover payroll expenses, health care benefits, employee salaries, rent, utilities and interest on mortgage debt. There are two programs:

1. Paycheck Protection Program (PPP)

PPP loans are made by traditional commercial lenders (banks, credit unions, etc.) with delegated authority under the SBA 7(a) guarantee program, and lenders are responsible for qualifying borrowers. Loans can be made up to $10 million, with 4% interest and up to 10-year terms.

Traditional lenders have typically shunned cannabis companies, so it is not likely many will receive funding from this part of the Act. Hemp companies have a better chance, but the loan approval process may eliminate many of these companies as well.

2. SBA Economic Disaster Loans

Economic disaster loans are made directly by the SBA. The loans can be made up to $2 million and require collateral plus personal guarantees. The interest rates are 2.75% for nonprofits and 3.75% for small businesses.

Since the SBA has explicitly stated that marijuana and cannabis companies are not eligible for SBA loans, it would appear that this would not be an option for these companies. However, hemp companies could qualify if they meet the other qualifications.

For the latest regulatory updates and more information on keeping your business running through disruption, visit the Armanino COVID-19 Resource Center.

August 3, 2019

Come Out of COVID-19 Stronger With Improved Internal Controls for Your Cannabis Business

Posted by Parnia Pandkhou

Blog updated May 21, 2020

internal controls

Internal controls are processes designed to ensure the reliability of a company’s financial reports, the effectiveness and efficiency of its operations and its compliance with applicable laws and regulations. They are a must for every organization but especially so for cannabis companies, because they are also a benchmark to establish credibility.

As your cannabis organization begins recovering from COVID-19 disruption, it can be an opportune time to start reviewing and improving your internal controls to help set up your business for future success.

Developing and implementing operational internal controls will help prevent errors and fraud and will result in a more accurate measurement of the financial health of the organization. The ability to demonstrate that a documented system of internal controls is being consistently followed will establish credibility for the business in four key areas: safeguarding assets, ensuring financial statement reliability, promoting operational efficiency and encouraging compliance with management’s directives.

Despite COVID-19, the cannabis industry has experienced growth. Companies have adjusted to new standards allowing them to remain open as essential businesses, such as curbside pick-ups and online ordering. Along with these new demands, organizations face ongoing banking issues due to the illegal status of marijuana at the federal level, compliance with complex regulations at federal and state levels, and high overhead. The industry’s unusually high reliance on cash transactions raises fraud and theft risks — among them, skimming, customer collusion and unauthorized spending.

This means that protecting revenues and profits becomes even more challenging as your cannabis business experiences an increase in sales. To mitigate these exposures, you can employ various internal controls, which we will discuss below.

Monitoring of employees with cash access

Even a strong vetting process and thorough background check before hire doesn’t guarantee an employee’s honesty. Typically, a staff member doesn’t engage in criminal activities until several years after being on-boarded. You should track employees’ schedules and monitor their behavior to uncover warning signs such as a sudden change in their working hours; strong objections to making procedural changes in transaction processing, inventory or vendor management; and their refusal to take vacations.

Control of cash receipts and payments

Using serially pre-numbered sales slips and conducting weekly audits will uncover missing slips that indicate discrepancies. Comparisons of daily sales and cash receipts will also expose whether cash is being pocketed. Video surveillance and segregation of duties (discussed below) will also reduce the opportunities for skimming.

Limit access to the safe and always make sure it’s locked. A key and combination access log should be used, and keys should be numbered and assigned to designated employees.

The use of serially pre-numbered purchase orders and verification of incoming orders before payment is authorized will help prevent fictitious and unauthorized purchases. Missing documents or gaps in transaction numbers could mean documents are being used for fraudulent transactions. A sudden increase in slow payments may also indicate an employee is stealing money.

If disbursements from the register are necessary, they should be carefully monitored. An unusual increase in customer refunds, voided sales or discounts are all potential indicators of suspicious activity.

Segregation of duties

Segregation of duties and responsibilities is key to internal control and needs to be adopted for operations, custody of assets and accounting. Separation of duties helps ensure that cash-related activities are monitored and cross-checked, and it reduces the chance of collusion between staff and vendors. Importantly, purchasing, receipts of cash and cash payments should all be handled by different employees. The physical handling of cash should be separated from its recording.

If your organization is small, segregation of duties will be difficult to achieve. You will need to adopt compensating controls to ensure that at least two people are responsible for any task.

System security

Having a robust accounting system with an experienced team of accountants and segregation of duties should result in solid recordkeeping. Employees will lose the ability to hide transactions; any backlog in recording them would signal an attempt to delay the detection of fraud.

It’s imperative to invest in your accounting, accounts payable and inventory software. You will want to keep it updated and restrict access to the financial system. Understand how your system can allow money to be diverted and inventory to be manipulated to determine how an employee might be able to commit fraud. Finally, change passwords often in your systems.

The ancillary benefit of having a strong accounting system is that it facilitates data analysis to detect buying trends, set pricing and mine data, as well as monitor cash activities. It will also organize your data to support and guide you in daily decision-making.

Internal and external audits

Have a yearly audit performed by an outside firm. The external auditor will test your internal controls, locate weaknesses and make suggestions to improve them. You should also conduct unannounced internal audits to uncover malfeasance and determine areas for control improvements.

Internal controls are essential to every business. In the cash-centric cannabis industry, their importance is only heightened. Strong internal controls will contribute to the long-term profitability of your company and help convince investors of your business integrity.

To learn more about strengthening your firm’s operations and internal controls, contact experts@armaninollp.com.

For the latest information on running your business through disruption, visit our COVID-19 Resource Center.

May 1, 2019

More Risky Business: New Labor Rules to Watch Out For

Posted by Jenn McCabe

labor rules

Labor statutes change multiple times per year, and states vary in their application of these changes.  This year is no exception. Labor rules changed again in over half the U.S. on January 1, 2019, and there have been additional changes, as well. Here’s a short list of what you may need to update in your own HR policies.

Overtime. In March, the Department of Labor announced a rule that makes another million Americans eligible for overtime pay in 2020. 

  • The overtime rules may seem crazy, but don’t try to cheat with hinky workarounds when it comes to classifying a worker as exempt from OT.
    • The salary level below which a person must be made eligible for overtime pay is $35,308/year. Note that the Obama administration had proposed a wage level of $47,476, so this is a bit friendlier, but still…

Caution: If this affects your workers, communicate in advance to avoid a stampede.

Harassment – Many states are updating legislation regarding harassment, particularly sexual harassment. 

  • Victims of sexual harassment may no longer be required to adhere to non-disclosure agreements regarding settlements.
    • Mandatory sexual harassment prevention training is being required more often, and for companies with as few as five (!) employees.
    • The definition of what qualifies as harassment is being broadened to include behavior that may not qualify under the prior “severe and pervasive” guideline.

Caution:  Some employers are adopting “zero tolerance” policies to discourage bad behavior.  That certainly may help, but it also may not be fair to the accused worker.

Marijuana –Depending on the state in which you employ workers, you may or may not be able to discriminate against legal marijuana users.  Can you test?  Maybe…

Caution: Do you have some, but not all, jobs where testing should be required?  That’s messy.

Hiring – Hiring is getting more complicated due to additional protections provided to applicants. Make sure your background check policies are up to date. 

  • You may no longer be allowed to request salary history information when screening applicants.
    • Prior criminal convictions may not be considered until after a job offer is extended.

Minimum wage – You can be certain the minimum wage changed somewhere near you at the state or city level.

Worker classification – Last year California became one of the newest states to adopt a 3-factor ABC test for classification. Know the labor rules on how to classify workers as either vendors or employees, which will vary depending on your state.

Board representation – Women are now required on boards of public companies in some states.

Parental leave – Parents are more protected in several jurisdictions.  We are seeing expanded parental leave policies and extra accommodations for lactating mothers who return to work.

As you can see, it’s a minefield! So you need to know the rules in your jurisdiction. Yes, it’s a time-consuming pain, but noncompliance is risky and ultimately very expensive.

Need some help? Don’t hesitate to reach out to one of our HR Solutions team members.