The Canadian marijuana industry is one that is currently booming and hence receiving global attention. However, according to accounting experts, the industry has many accounting issues that its companies are not efficiently combating.
A recent article in Canadian Business quoted forensic accountant Al Rosen as saying “It’s a bloody mess,” when referring to accounting in the marijuana industry in Canada.
According to the article, many of the companies in the sector post account and statements that are misleading and often overstate profitability.
“Canadian reporting of marijuana growers sets a new low for integrity,” Rosen wrote in a recent report. It’s not that companies are intentionally duping investors; companies are trying to apply already-vague accounting rules to a new industry, according to the report. Managers often provide inconsistent estimates of pricing and demand of marijuana plants and since the industry is a demand based volatile one it can be difficult to determine future prices.
Another factor mentioned in the article is the expectations from investors about marijuana companies. Investors can be easily misled if they are using the numbers the companies are putting out. Valuations of these pot companies are going up everyday which means that investors are trading based on future projections and all the hype that is currently surrounding the legal marijuana industry.
Canada follows the IFRS standards, which refers to the International Financial Reporting Standards followed by most other G20 countries. However regarding marijuana companies, experts have said that IFRS can be one of the reasons investors are being misled. IFRS gives companies leeway when it comes to reporting their earnings, this can be easily misused by companies which want to project itself as a winner especially since the industry is seeing a boom.
For example, IFRS allows for agricultural companies to use the estimated increase in the value of their biological assets such as plants to offset costs; however this cannot work right now for a commodity like marijuana which is not a well established industry yet. Similarly gross margins are not entirely accurate either since different companies are using different methods to calculate them.
The media article also said that one companies in the industry when contacted said that it was not their place to comment on the matter, while another said it aimed at giving investors transparency.
However investors are not really looking into the financial statements of marijuana companies now. “I don’t think investors are even paying attention to what the company does,” one expert said. The increase in share prices and their movement was based on various new plans of the companies like partnerships and future plans including expansions.
Investors have no other option but to trust everything the companies are saying and since it is such a hot investment area right now, there are more than willing to do so.