Our Take:

Again, this one goes way back. 2014 is like a life time in what we like to call “canna time.”  We can’t underscore the importance of self-regulation. The point made in this article about the whole team coming together around “issues challenging their business.” We feel strongly that success and failure for those in the regulated market will often come down to your ability to operate as a regulated business.


Source: Canna Law Blog  |  Date: 12/22/14  |  Author: Robert McVay

In Shoring up Your Cannabis Business With Audits, I wrote about why regular audits (compliance audits, accounting audits, inventory audits, etc.) can be so useful to cannabis businesses. I talked of how providing cannabis businesses information regarding their standard operating procedures enables them to determine which are working well and which ones need to be modified.

In the past couple of weeks, we conducted a whole host of legal compliance audits and this post is on how those audits can be helpful and on some of the challenges that remain entrenched in the cannabis industry.

One of the things we most like about our legal compliance audits is how they essentially “force” the different decision makers in a cannabis company to come together and focus on the issues  challenging their business and put together plans to solve them. On a couple of our audits, it was the first time in months that the individuals in charge of cultivation, financial compliance, regulatory compliance, and business development had been together in the same room. This type of collaboration is sometimes necessary because working in a highly regulated space like the (cannabis industry) requires broad coordination to ensure that everyone is staying in line. All too often, communication on core issues peaks during a business’s planning stages, but goes into decline once the business is up and running. It is important to maintain and schedule consistent communication among business partners with varying responsibilities and areas of expertise to ensure that everyone understands the short term and long term goals of the company.

We also liked that the audits served as a catalyst for all of the questions, however minor, that owners and employees have about complying with the vast number of regulations to which they are subject. In this industry, where everything is new and untested, it is impossible to have a black and white understanding of compliance in all instances. The rules just are not clear enough to make that possible and the lack of precedent only intensifies that problem. It does not always make sense to call your attorney to ask whether you should stack one quarantine box on top of another box or side by side. A compliance audit  is the perfect time to get an answer to this sort of question, or at least to find out that there is no good answer yet.

At their core, these audits are really about self-assessment. This is great in and of itself, as an introspective business typically has an easier time identifying and resolving its weaknesses. Self-assessment is also an important part of training, and legal compliance audits are just another form of owner and employee training. The training and self-assessment that comes from an audit reduces rule violations by teaching and helping to establish consistent practices.

Most importantly, a legal compliance audit of a cannabis business can serve as a mitigating factor in the vast majority of penalty schemes. One of the most important parts of any compliance training session is the sign-in sheet. No business is perfect and all businesses commit violations every now and again. However, if regulators come to levy a civil fine against your business and you can provide documented proof that you performed compliance self-assessment and training, the regulators have legal grounds to reduce penalties, and they almost always do. Regulators want to encourage these kinds of training sessions and practice reviews, as they improve compliance and make their jobs easier.

Our audits also revealed that there is still a disconnect between what state regulations say can and should be recorded in the system and what state-mandated tracking and traceability software actually allows for. Our most recent series of audits also disclosed that different regulatory enforcement officers are providing different licensees with different agency interpretations of the marijuana regulations. Some of our cannabis clients are even receiving inconsistent instructions from the same enforcement officers at different times. In short, the growing pains that we all knew that an early stage industry would have are showing themselves.

We remain impressed with how focused the majority of the industry is on doing things the right way. Just about everyone in the cannabis industry understands how legalization has put a spotlight on those in this industry and they want to do whatever they can not to have it shine brighter from regulatory violations.