The Importance of Cash Controls for Cannabusinesses
March 2, 2017 - By: SC&H Group
Best Practices for Reducing Misappropriation and Improper Transaction Reporting
The following blog post from SC&H Group’s Tax Services team discusses the significance of controls in cash-intensive industries, providing cannabusiness owners with an overview of key paper controls and physical and electronic safeguards.
As a cannabusiness owner, you face several unique financial challenges. With Federal laws classifying cannabis as a Schedule I controlled substance, you likely cannot obtain adequate banking services. Similarly, credit card processors will not process your cannabis transactions. What can you do?
For most cannabusinesses, the answer has been to handle large volumes of cash. However, this practice increases the risk of misappropriation. Also, unlike transactions conducted via credit card or check, cash transactions do not automatically generate documentation. Therefore, they may result in improper recording of such transactions.
The Casino Model: Strong Internal Controls in a Similarly Cash-Intensive Industry
To reduce the risk of misappropriation and improper transaction reporting, cannabusinesses must implement and maintain very strong internal controls over cash—including many of the key manual and physical controls seen in the casino industry.
The casino industry, which also handles large volumes of cash, has developed procedures and standards that can be tailored to and implemented in a cannabusiness. These controls take the form of:
- Paper controls
- Physical safeguards
- Electronic safeguards
Paper controls include forms and other documentation that are originated, reviewed, and approved throughout the process. For example, sales receipts should be sequentially numbered, two-part documents that contain, at a minimum:
- Products and quantities sold
- Dollar amount of the transaction
- Payment method
Total cash receipts, per the sales receipts, should be reconciled to deposits at least daily, if not at each shift change for retail locations. Cash receipts should be placed in a locked bank deposit bag with the count sheet and sales receipts.
In addition, access to cash funds should be restricted and always involve two or more personnel (i.e., the count team). All count team members should be present before the count of the daily deposits begins, and no one else should be allowed in the area while the count is conducted.
The count should be recorded on the count sheet in ink or other permanent form of recording. Also, count team members should sign the document attesting to the accuracy of the count. Once the funds are deposited in the bank, the validated deposit slip should be compared to the count sheet.
A key physical safeguard is electronic surveillance of the facility, especially where transactions occur and cash is stored. Other physical controls include using safes or vaults and establishing proper control over access to bank bag keys. While many casinos use a drop box cart that can be locked, cannabusinesses should instead consider using locked bank deposit bags.
Another option may be to have an ATM on location for use by customers. In addition to providing a convenient way for customers to access cash for their cannabis purchases, it is an effective way to recycle cash and facilitate electronic deposits to the company’s bank account. The ATM should be replenished by the count team.
Systems of people watching people, including the “eye in the sky” and video surveillance, are major components of internal control in the gaming industry. Cameras should be in all areas where cash transactions take place, cash is counted, and cash is stored. Each camera should be capable of focusing on and zooming in on these areas, and all cameras should be monitored.
However, these visual controls are only a supplement to the standardized process that must be in place for the handling and movement of cash.
Lastly, management should closely monitor and analyze trends in their operations for any deviations from expected performance that could indicate possible misappropriation of cash.
Want more information on cash controls and other ways to ensure the short- and long-term success of your cannabusiness? Contact SC&H Group’s Medical Cannabis Advisory practice here.