Editor’s note: This is the final installment of a three-part series about business issues that accounting professionals should be aware of, now that adult recreational cannabis is legal in New York.

Others, such as Mitzi Keating, the co-leader of Citrin Cooperman’s cannabis advisory services practice, began from a personal interest in the industry. Keating said that, as a local politician in Massachusetts, which legalized recreational cannabis in 2016, she saw that there was a strong need for professional accounting services in the burgeoning sector. While her firm had represented a few cannabis clients “in dribs and drabs” over the past decade, it lacked a dedicated practice area. When she asked the CEO, Joel A. Cooperman, why the firm didn’t have one, she was then challenged to create it herself.  

Regardless of the reason, opening a cannabis practice generally requires a great deal of due diligence before the decision is even made. For instance, there is the question as to whether taking part in an industry that is still illegal under U.S. law jeopardizes one’s license. While, generally, this has not been an issue in New York state, Keating said that the rules and regulations can vary from state to state, and it is important to understand any license issues that may arise.  

“[CPAs must ensure] that the state in which you choose to operate, or the clients you will serve, won’t [jeopardize] your license or run afoul of any license issues from the board,” she said. “Every state has a different regulatory environment you’re operating in, so it’s important to understand the environment of the state you operate in.”  

Another major task is to discuss the idea with the firm’s insurance carrier, preferably early in the process, in order to make sure that the activity will still be covered under their professional liability policies. Without that coverage, the risk calculation changes dramatically, and so practitioners said it is vital to loop their insurer in on their plans.  

“There was a little bit of concern because it’s kind of a gray area,” said Nicholas A. Agrippino, who heads Bowers & Company CPAs LLC’s cannabis and hemp practice. “Insurance—it’s definitely important to mention it to your carrier, to make sure there’s no issues.”  

Gary M. Florian, vice president of underwriting and policy services at professional liability insurance company CAMICO, agreed. He said that a cannabis practice is inherently more legally risky than other practice areas, though there are degrees. What he and other insurers want is to determine just how risky the circumstances are, noting that cannabis is still a Schedule 1 controlled substance, which carries a number of other considerations.  

“It’s still a gray area, with regard to the various state boards of accountancy, in terms of how they would view a CPA firm engaging with cannabis clients,” Florian said. “And then there are the technical issues with regard to, say, tax law ... and the reputational risk: How would the firm’s other clients feel if the CPA firm were in the news, with regard to their engagement with a cannabis client? Is there a concern?”  

Pellitteri noted that, because he didn’t want to cut corners, his meeting with an insurance carrier included not just him but the firm’s CFO, internal counsel and own insurance team. This, according to Florian, is the kind of preparation they like to see when a CPA firm says they’re thinking about going into cannabis.  

“Before they’re talking with us, [we want to know] they’ve already thought through a lot of the risk issues themselves, and they want to bounce their thoughts off of us,” he said.  

Florian said that the less experience a firm or client has in the industry, the less likely it will be insured or, if it does get covered, the higher its rates will be. He added that carriers prefer that CPAs get involved in lower-risk aspects of the industry, such as tax or bookkeeping, rather than in services such as auditing or business consulting, though he noted that specific facts and circumstances can still affect a firm’s decision. He added that, in most cases, anything cannabis-related that involves any sort of public audit “would not be an interest of ours.”  

Finding clients 

If, after all this, a firm still decides to start a cannabis practice, there is the matter of finding an initial client base. While some might be able to start with existing clients expanding into the space, as Keating did, others had to do so through a combination of networking and marketing. Sometimes, such as in the case of Herman P. Ortiz, a sole practitioner from Melville, this is simply a matter of setting up a website.  

“I’ve made some connections, but a majority of the clients I’ve had interaction with … all found me online,” Ortiz said. “I didn’t even pay for advertising; I just created a landing page on my website.”  

Others, such as Pellitteri, continued to make use of conventions and trade shows when recreational cannabis became legal in New York.  

“Over time, we got involved in a lot of industry conferences and events, particularly here on the East Coast—the Cannabis World Congress, hosted at the Javits Center, for example,” Pellitteri said. “We started there, and then we also, at the end of the year, attended a national conference called MJBizCon, out in Vegas, and there were similar forums. That was how we got our names out there.”  

Referrals were also a rich source of clients, as they are for a lot of practice areas. John R. Loughren, who operates a firm in Westchester, leaned heavily toward this method as he began his own practice, particularly referrals from attorneys. “I’m a member of the Westchester County Bar Association, and I’m in a couple of networking groups with attorneys who are really into the cannabis area,” Loughren said. “Their business is exploding, so of course, they need an accountant’s help as well.”  

The need for due diligence 

The topic of rainmaking, however, leads to another major area of risk that practitioners must consider: the clients themselves. Because of the increased risk of a cannabis engagement, practitioners reported having to perform a little more due diligence than they would for a more mundane client. What they find in this due diligence can be unpleasant and has resulted in virtually everyone reporting that they reject more clients than they take on. Agrippino said that a lot of these rejections are made in order to protect the firm from legal risk.  

“There will always be those legacy market operators that are maybe trying to transition what may have been an illegal operation into a legal market,” he said. “Obviously, we would like to see that, but you’ve got to have the due diligence to make sure you’re not dealing with folks who might be one foot in and one foot out.”  

There was also a hesitancy to take on clients who the firm thought were not experienced enough in the industry or who did not seem to have a good idea of what participation in it would involve. Because the sector and its various rules and regulations are so complicated, CPAs want clients who understand what they’re getting into, according to Pellitteri.  

“The ones I turn away have no knowledge of this space,” he said. “That’s important, especially if you run a large operation. ... It’s not like growing lettuce; it’s not like tomatoes. There’s an art and science to it, and it takes a long time to get good at it, and if you’re not prepared, you’re going to go broke.”  

The other major reason why Pellitteri rejects clients is unrealistic valuations, saying that if he cannot trust their numbers and can’t figure out how they were derived, “it’s not right for us.” He explained that such unrealistic valuations give the impression that the prospective client is just looking to make a quick buck in an industry where that doesn’t really happen. When companies enter this industry with that sort of mindset, he said, “there’s bound to be problems.”  

Keating stressed the importance of client vetting, noting that mistakes with a federally illegal substance can be very costly to both the firm and the client. Firms will need to develop the appropriate language in their engagement letters, as well as have solid criteria for both engagement and disengagement, at a minimum. She added that firms should ensure that they receive retainer payments up front.   

“A lot of people are looking for free advice or are license holders that never really get off the ground, so you want to make sure you’re protecting your firm and [that] protection goes through client acceptance, the engagement letter process and your insurance process,” Keating said. “Make sure you know who your clients are and that they know what they’re doing.”  

Options for startup firms 

With firms preferring more experienced clients who understand the industry, however, the question arises about where a small startup can go for accounting services. The answer might be in smaller firms. Loughren noted that, “If you’re a little smaller, you have a little higher risk tolerance.” This seemed to bear out with at least some smaller practitioners, who reported having more local startup clients than large multistate operations. “More risk tolerance” can be a relative term, though, as Loughren emphasized, he still carefully controls risk.  

“I think I have a little advantage over some other smaller firms because my background is in forensics,” he said. “I’m certified in financial forensics, and I’m a [certified fraud examiner].”  

Agrippino noted that another reason why a small startup might be more inclined to contact a small or regional firm is that such a firm would likely be more accommodating, not just in terms of risk tolerance but in overall business development.  

“We’re not cheap. We’re good professionals, but at the end of the day, we’d be more apt to take on a smaller startup client and work with them through the bills until they get established in the market and get that groundwork done,” he said. “Me, personally, my favorite clients to work with are folks who started out when they were just a small business, and now we’ve grown with them to maybe a business that makes upward of a million a year.”  

There is also the basic value proposition: A startup is unlikely to have as much capital as a major multistate operation, and so, smaller firms have an opportunity to service clients who may be less enthusiastic about paying a large practice with an international footprint.  

“I think there are opportunities for small accounting firms to deal with these mom-and-pop entities, and if we’re talking about social justice in the community that we need to correct for, people who are economically disadvantaged, maybe one-on-one with a small shop makes more sense than a big firm, because those shops won’t be able to afford a big firm. So from that perspective, there’s great opportunities,” said Martin H. Lager, a sole practitioner who is assisting a real estate client looking to expand into the cannabis space.  

Ortiz pointed out, however, that smaller firms may not necessarily have the resources to provide the same suite of services as larger firms. He said that it is important for firms to be honest in what they can offer, and noted that he, himself, is more involved in auxiliary services in the cannabis industry, such as real estate and consulting. Yet, in these areas, he said that a smaller firm can still provide a valuable service for a client.  

“The only thing we do is just say to those clients, ‘To tell the truth, … we’re small, and we don’t take on everyone, but you’re going to get the same amount of service, because if you hire a bigger firm, you have two or three people on the team, and you’ll get the same thing from us, too,’” he said.   

Regardless of the size of one’s firm, the types of services offered or the kinds of clients one takes on, these practitioners agreed that this field is too complicated for mere dabblers. Prior to opening their practices, all of them spent a great deal of time educating themselves about the relevant laws and regulations, and they continue to do so, as rules and regulations change very quickly in this sector. This is part and parcel of the fact that while running a cannabis practice is not necessarily more expensive than running other practice areas, it usually demands much more time and attention due to the risk and complexity. CPAs unwilling or unable to devote the necessary time to this area are treading on dangerous ground, said Keating.  

“You can’t stick 10 staff members on a client engagement; [you need] a lot of partner time and attention because of the complications associated with it,” she said. “It’s more of a thought leadership cost, and firms need to be willing to invest the nonbillable hours to understand the tax court cases that impact the industry, [and] to really read and understand the regulations. ... It’s all about time to develop, internally, audit programs, review and compilation procedures, riders, addendums to engagement letters for cannabis-specific language, and a screening process and the monitoring process. It’s a lot of internal work to maintain the practice, so it’s not exactly additional cost, but it really is a lot of time and effort on behalf of the firm.”