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Fraud in the Marijuana and Hemp Industry by employees and executives?



Is there fraud in the Marijuana and Hemp industry? Absolutely! Where there is opportunity there is fraud! The ACFE 2020 Report to the Nations, (Association of Certified Fraud Examiners) states that there is an “average of 5% of revenue is loss to fraud for the average business each year. That equates to $4.5 trillion! ACFE also found that a lack of internal controls contributed to 1/3 of all fraud. ACFE studied 2,504 cases of fraud from 124 countries and the average loss was per case was $1.5 million. The 2,504 cases amounted to a total loss of $3.5 Billion. Asset misappropriation makes up 86% of fraud but only results in a median loss of $100,000, corruption makes up 43% of fraud for a median of $200,000, but financial statement fraud is only 10% but accounts for a median of $954,000” (1)

The fraud triangle shows the 3 main components that contribute to fraud; Opportunity, Need/Pressure, and Rationalization.



Need/Pressure Rationalization

1. Opportunity: The employee/executive needs to have the opportunity. Do you have the right processes in place to prevent the opportunity?

2. Need/pressure – the individual has a pressing financial need such as: a drug habit, financial crisis (over-spending, gambling debts, illness in the family, or just plain old greed.)

3. Rationalization – The individual rationalizes the need to steal; “I will pay it back later”, “I need it more than the company does, after all they have plenty”, “I have to pay my debts and they do not pay me enough or treat me well” or “I deserve it”; “It’s just a few things or just a little bit of cash, they won’t miss it,” “It is just one bottle of product it won’t be missed, after all, they have plenty!”


How do you prevent fraud in your company?

1. Separation of duties. No one person should handle all the cash, inventory, payments, or payroll. Divide duties between individuals and make sure there is oversight over those individuals who handle cash, payroll and inventory.

2. Perform cash counts and reconciliation every day, verified by another individual/department.

3. Perform inventory counts and tracking of discarded or waste products. Make sure all product is accounted for.

4. Make sure no one individual has “all” the power.

5. Watch the timecards – make sure that hours are not being over reported (fake overtime).

6. Watch for paycheck fraud. A person creates fake identities and accounts and has paychecks in those names paid to them. Make sure that the employee list is checked for duplicate addresses, ex-employees etc.

7. Watch for vendor fraud: Verify that the vendor really does exist and is valid. (not set up by an employee or executive to “pay” vendors that do not actually exist.)

8. Make sure that the vendor is invoicing correctly, not padding their invoices with higher prices, more product than actually received, etc. (watch for kickbacks to employees/executives) Use of a secure purchase order system will help with prevention of invoice padding.

9. Have the right corporate and accounting procedures in place.

10. Make your accounting firm assist you in creating the right processes and procedures, and ensure they are being followed!

11. Always be aware!

References:

(1) https://acfepublic.s3-us-west-2.amazonaws.com/2020-Report-to-the-Nations.pdf

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