The allegations have not been proven in court.
Investor enthusiasm is not uncommon in startup operations. Entrepreneurs are driven by vision―and, often, they have a singular focus on achieving results. Unless one of the principals in the startup has a financial-accounting background, it is unlikely the accounting process is considered more than an overhead function.
The fraud triangle
The Canadian Cannabis market is very susceptible to fraud.
Forensic accountants often refer to the fraud triangle, three elements that create an optimal environment for fraud to occur:
- Motivation or pressure
The flood of investor capital, the absence of internal control, the high level of trust without established oversight mechanisms all point to an elevated level of opportunity.
The rush to get to market, to build facilities and obtain licences, created motivation (or pressure) to behave improperly.
Improper behavior can be rationalized. Common rationalizations allow fraudsters to convince themselves that they are not doing anything wrong:
- “It's just a loan, I'll pay it back later.”
- “I work a lot of overtime―I've earned this.”
- “It's for the good of the company.”
Preventing and detecting fraud
To reduce the risk of fraud, all companies―startups, scaleups, or mature businesses―need a balance of prevention controls and detection controls.
Prevention controls are designed to prevent the loss from occurring in the first place. Prevention controls include:
- Code-of-ethics policies (extending to suppliers)
- Segregation of duties
- Restricted signing authority on bank account(s)
- Dual-signature requirement(s) on payments above a determined threshold
- Unused cheques stored in a secure location
- Payments not issued unless an invoice is approved by an appropriate principal
- Electronic access to bank account(s) restricted to key personnel
Detection controls are designed to identify improper activity when it occurs, or within a reasonable period of time after an occurrence. Detection controls include:
- Bank reconciliations
- Internal audits
- Preparation of, and management to, budgets (operating and capital expenditure)
- Period-to-period analytical reviews
- Whistle-blower hotlines
How BDO can help
Not all fraud can be prevented—employee collusion or management override can frustrate almost all prevention controls. BDO professionals with cannabis-industry experience can assess your fraud risk and develop appropriate internal controls specific to your business.
If your organization has been the victim of some form of fraud, or you are a concerned shareholder or board member, BDO can offer deep understanding of the nuances of fact-finding investigations and the importance of efficiently and effectively collecting reliable evidence.
We offer a full complement of Risk Advisory, and Investigative and Forensic Accounting services. Contact us.