It’s been almost six years since the Canadian government legalized recreational cannabis and ever since, a microcosm of financial reporting and auditing has been growing (no pun) beside it. Leading the pack in cannabis clients was KPMG Canada.
Here’s a snapshot from 2019 that shows how much cannabis companies were paying to which auditors:
A look at 40 Canadian cannabis companies and what they paid to their auditors over their past fiscal year. Suffice to say, business is good and KPMG is well in the lead.
— Michael Miller (@Porters6thForce) November 11, 2019
(Note that many companies switched auditors so not all fees listed went to the current auditor.)#PotStocks pic.twitter.com/S5Fuau3z9O
According to the most recent data from the gubmint, the cannabis market in Canada was a $5.07 billion Canadian dollar ($3.7 billion USD) business in 2023, up 12.2 percent from the prior year.
And now KPMG is walking away from it.
KPMG in Canada has decided to cease providing financial-statement audit services to businesses in the cannabis industry, marking an incredible turnaround for a company that had raked in millions from the burgeoning sector.
The accounting firm confirmed the move in a statement to MJBizDaily, citing “elevated risk” in Canada’s adult-use cannabis industry.
“KPMG in Canada is committed to delivering high quality audits and upholding the integrity of our capital markets,” Kevin Dove, national director of external communications for KPMG Management Services, said via email.
“Given the continued challenges facing cannabis growers, we have made the decision that this elevated risk no longer meets the risk tolerance of our audit practice.”
Apparently the weed market up there is a mess. One issue is producers failing to pay their excise taxes and racking up a debt of $273.4 million Canadian dollars ($202 million) to the Canada Revenue Agency (CRA) as of the end of 2023 (Source: “Canada’s unpaid cannabis taxes soar 72% to almost CA$300 million” in MJBizDaily. This number was almost $150,000 CAD in 2019, up to $4.4 million in 2020, $16 million in 2021, and $145 million as of March 2023. Some of this can’t be collected at all as 123 cannabis companies exited the space in 2023, a threefold increase from 2022 (Source: “Canada’s canceled licenses, ‘uncollectible’ cannabis taxes soar” in MJBizDaily).
MBD:
The latest CRA data shows that at least 212 licenses were canceled between federal marijuana legalization in late 2018 and Feb. 29, 2024, with 58% of the cancellations happening in 2023 alone.
Tanner Stewart, co-founder and CEO of cannabis license holder Stewart Farms in New Brunswick, suggested the excise tax is a contributing factor to companies exiting the industry.
“At the end of the day, the excise tax is so severe that it truly impacts your balance sheet from a margin perspective,” he told MJBizDaily in a phone interview.
So perhaps a wise move on KPMG’s part to get out now.
KPMG explains its assurance risk analysis in detail in its 2023 Transparency Report [PDF] and says they “undertake an annual re-evaluation of all audit clients to identify risks in relation to continuing association and mitigating procedures that need to be put in place.”
“In addition, clients and engagements are required to be re-evaluated if there is an indication that there may be a change to the risk profile,” the firm says.
Sorry, cannabis companies, it’s not you it’s me. Oh wait it is you.
