The cannabis industry is facing an accounting crisis as numerous marijuana firms have had to fix errors in their financial statements in recent years through restatements. Restating financial records is a rare occurrence for public companies since it can be detrimental to the firm’s image. For this reason, this is seemingly a rather grim sign for businesses in the marijuana sector. 

According to MjBiz Daily, 2020 had the least financial restatements by public companies in the last 20 years. Unfortunately, a significant number of them have been from the marijuana industry. As a result, this has made it increasingly difficult for investors to measure the financial health of public cannabis companies. 

What’s more, the restatements from the cannabis sector have included several high-profile companies within the industry. One such case is that of Jushi Holdings, a Florida-based multi-state cannabis operator that handles retail, cultivation, processing, and manufacturing. The firm released a statement saying it had filed restated financial results for this year’s first quarter through a press release in September. 

KushCo Holdings, a dispensary packaging company, also restated financial data in 2019. KushCo Holdings had merged with Greenlane Holdings and other marijuana firms to solidify its position in the industry. In a press release, the company explained that it had identified inadvertent errors in its accounting after the acquisitions and would file the amended reports as soon as practicable. 

More recently, Verano Holdings, a multi-state cannabis operator, said it would restate five quarterly financial statements dating back to March 31, 2021. In a news release, the company expressed that the restatement would include reevaluating its stock-based compensation and recalculating its tax expenses. As a result, the firm’s stock fell by 10% following the announcement. 

Common Mistakes

Matt Karnes, the founder of cannabis financial consultancy GreenWave Advisors, ascribes this increased number of restatements to the prohibitions upheld by the federal government. The bans restrict top accounting firms from providing services to cannabis brands. They also affect the cannabis sector in numerous other ways, which impedes the industry’s growth.  

Due to the lack of professional accounting services, many companies in the cash-based sector are prone to errors. Similarly, cannabis brands grapple with other pitfalls that affect their financial accuracy, including keeping up with fast-moving inventory and complex ownership structures. 

Federal tax laws are another reason why companies in the cannabis sector file restatements. These rules prohibit marijuana firms from taking traditional business deductions, causing confusion and increasing the risk of discrepancies. Still, according to John Pellitteri, a partner at Grassi Advisors and Accountants, these issues are common in the burgeoning cannabis industry. 

Even so, Pellitteri believes that marijuana businesses will understand how to avoid restatements with time. The seasoned accountant explained that the cannabis industry is still evolving, and such mistakes are to be expected. Additionally, due to the murky business landscape in the marijuana industry, companies may have to learn about this the hard way. 

Legal Consequences

Apart from missing out on potential investors, cannabis companies that file financial restatements risk facing legal action. Shareholders and other stakeholders of a marijuana firm can file a class action lawsuit. Restating a public company’s financial statements can be interpreted as misrepresentation, which can be detrimental to share prices and bring losses to individual investors. 

For instance, Toronto-based Cronos Group announced a restatement of its finances due to its failure to report more than $220 million in impairment charges. The restatement caused the company’s stock to plummet by nearly 15%, which was quite a blow for investors. As a result, various law firms urged investors who had lost more than $25,000 to file a class action lawsuit against the company. 

Bottom Line

Numerous companies in the cannabis industry have filed financial restatements over the last few years. Consequently, this has been detrimental to the brands’ images, and some have even faced legal battles. Even so, many industry experts explain that this is common for unconventional industries such as the marijuana sector. They believe this displays a maturing industry as companies learn to deal with these issues with time.