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One of the most serious issues facing cannabis licensees, regulators, and the public is fraud.<\/p>\n
The most common type of fraud is misreporting cannabis inventory, with management or employees either ignoring internal control and government regulations, or sidestepping them in the name of profit. \u00a0<\/span><\/p>\n Fraud in compliance auditing relates mainly to the operations of the licensee, but also to fraudulent reporting on compliance issues. Instances of non-compliance with authorities may constitute deliberate misuse of a license to grow, process, or sell cannabis for improper benefits.<\/p>\n Improper benefits are advantages of a non-economic or economic nature gained by an intentional act by one or more individuals among management, those charged with governance, employees, or third parties.<\/p>\n Planning and factors that contribute to fraud include:<\/p>\n \u2022 Poor internal controls<\/p>\n \u2022 Management override of internal control\u00a0<\/span><\/p>\n \u2022 Collusion between employees<\/p>\n \u2022 Collusion between employees and third parties<\/p>\n Observation:<\/b><\/span> Compliance officers\/auditors may observe the extent to which the management and staff are complying with policies, procedures, and internal controls.<\/p>\n Observation may reveal a deficient control environment including a lack of ethics and integrity on the part of top management.\u00a0<\/span><\/p>\n Inspection:<\/b><\/span> Compliance officers\/auditors may examine the record for processing large rounded amounts of raw cannabis and the yields.<\/p>\n Interviews: <\/b><\/span>Compliance officers\/auditors may interview top managers and key officials and note changes in management and employee behavior indicating deception, corruption, red flags, and other abnormal occurrences that indicate fraud.<\/p>\n Analytical reviews: <\/b><\/span>Compliance officers\/auditors compare production information from period to period to identify abnormal production data relationships.\u00a0<\/span><\/p>\n Walk through: <\/b><\/span>Compliance officers\/auditors may trace an original source document through recording processes to test the reliability of the internal control systems and discover opportunity points for fraud.<\/p>\n In cases where the management does not give due importance to the irregularities identified, the risk of fraud is higher.<\/p>\n If and only if the compliance officer has irrefutable proof of fraud committed by management, they should contact an attorney.<\/p>\n The compliance officer should explain the situation, provide documentation, and ask the lawyer for the following:<\/p>\n \u2022 Guidance in preparing a document for the proper parties.<\/p>\n \u2022 Guidance on employment law to ensure the compliance officer is within their rights to report the information, and how to protect their job.<\/p>\n \u2022 Guidance on the proper parties to report the information to, and how to find them.\u00a0<\/span><\/p>\n The attorney will find out from the state exactly to whom the license was issued.<\/p>\n There may be multiple stakeholders who should be apprised of the situation, but one or more of them may be involved.<\/p>\n The proper way to handle this is to give the information to every shareholder and all people on the license.<\/p>\n The compliance officer should contact the licensee and inform them of their findings.\u00a0<\/span><\/p>\n If the licensee is not involved, generally they will tell the compliance officer to document everything in order to either fire\/prosecute the alleged perpetrators, or if they are involved, they will either fire the compliance auditor, or try to explain it away.<\/p>\n In the event of the latter, the compliance auditor only has one choice \u2014 report it to regulators. Make sure you\u2019re prepared for what you might find! \u03d6<\/span><\/p>\nSome of the techniques used in identifying fraud are explained below.<\/h3>\n