Oct 2, 2020

Interview: How ProTerp Handles Regulation Audits

Cannabis audits are a large part of being a player in the regulated industry. They aren’t super fun, and they’re even downright chaotic if you don’t have all of your information organized where you can access it anytime. The time you are scrambling to get your data assets together is time you could be spending scaling your business. 

Having your entire supply chain recreated visually and reports that generate automatically at the click of a button can mean the difference between an unorganized audit and a smooth time-saving process. 

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We spoke to Nuriya Safarova, owner and Chief Compliance Officer of ProTerp Cannabis Manufacturing laboratory and owner and CEO of Tax Gear, LLC about audits as ProTerp is going through the process right now. For the past seven years, Nuriya has been assisting cannabis businesses throughout the United States in licensing, compliance, and how to prepare for compliance audits.

Having your entire supply chain recreated visually and reports that generate automagically at the click of a button can mean the difference between an unorganized audit and a smooth time-saving process. 

How does a regulatory board choose a business to audit? Is it random?

I’ve found that jurisdictions that are relatively new to the cannabis industry  are far more likely to audit their operators within the city or the county lines. Generally, every year applicants need to renew their business operating license to continue operating in their area. Applicants also report their gross revenue in order to pay the monthly/quarterly or annual community benefits fee (also known as the local tax). And because the cannabis industry is still isn’t able to have a proper banking system, operators are forced to deal with cash. 

Additionally, for each jurisdiction it is very important to confirm that their cannabis businesses are operating in a compliant and safe fashion. Annual audits are not just for formalities,.They are equally important to the operators. Audits help regulators understand each cannabis business on a deeper level and allow them to revisit their regulations with new knowledge that was acquired through the auditing process. Having such transparency between the regulator and the operator allows to set a reasonable standard that assists such businesses in growing successfully and with the help of local jurisdictions, the operators develop their organizational practices further. 

In my personal observation, jurisdictions that have a more conservative approach on cannabis industries are more likely to audit their operators.

Walk us through an audit procedure A-Z.

Each governing body typically sends a notice of an audit that outlines the items they would like to examine and operators are usually given 30 days to respond. 

For example, one of the more extensive and also very common audits that I have gone through is the City Financial Audit. Because the cannabis industry is still in limbo with the banking system, many of the operators are dealing with cash. A financial audit consists of examination of the books, cash receipts, ledgers, invoices, banking deposits, cash procedures, and vendor/client contracts.

Operators also undergo a Manufacturing (Production) Audit by submitting an overview of production processes, production reports and incoming and outgoing METRC (state cannabis tracking software) transfers of product to determine volume and potential revenue of each business. A financial auditor examines a pattern of production yields, losses, waste material weights and other percentages to determine how much a particular business is able to produce on an average basis. They then match the outgoing METRC transfers to revenues and invoices that were generated by the business and compare that to what the operator has reported to the local jurisdiction for calculations of their local tax.  The auditor also takes a look at the type of products that are being created by the facility in order to determine their current market value.

A Sales Audit takes place. An auditor closely examines how the business is handling new clients, how the intake of goods/material takes place, compliance packets and how the inventory is tracked via each client and/or vendor and how purchase orders get completed and documented in preparation for production.

A Security Financial Audit typically consists of examination of the Security Protocols which is one of the important parts of the business. Typically the police department or the sheriff’s department examines the security protocols set forth by the business and ensures that the physical premise matches what is on the written plan and their premise diagram and there are no security concerns that need to be addressed by the operator.

The Fire Department Audit is also highly important especially for facilities like mine which manufactures cannabis concentrates using volatile solvents. This type of an audit usually consists of a physical inspection of the facility to ensure safety, examination of Safety Data Sheets, up to date equipment maintenance logs and equipment certification reports along with proper installation and an audit of all hazardous materials that are on licensed premises.

OSHA is another agency that gets overlooked by operators and that is one of the audits I was faced with throughout my career. OSHA is responsible for the safety and compliance of your workers. This audit typically includes a physical inspection of the premise and the written protection plans set by the operators and we are given 30 days to comply with any corrections that are noted for that particular business.

And last but not least is the annual review of the state license. Although it is not part of the formal audit request by the governing agency, it is in itself an audit for the business. This type of review typically requires all of the insurances and required annual documents to be up to date, equipment certifications are in place and your physical premise matches what has been submitted to the state.

What do you wish you had known beforehand to prepare?

Although the audits I have faced with so far are typical of any business and I have prepared my facility for such audits to take place, I wish I had spent more time learning about the audits and regulations and passing that knowledge down to our clients/vendors on how to properly invoice and send receipts with required documentation especially when it comes down to cultivation tax. Because of how new the industry really is, it is difficult to ensure such organization throughout the entire supply chain while many of the questions are still unanswered by the governing bodies.

What is your best advice for a company pre-audit?

The administrative organization of your business is by far most crucial. A lot of folks in the industry procrastinate in engaging with tax professionals, bookkeepers, consultants, and quality software. until it is time for an audit which is just too late. The process then becomes a nightmare, not just for the operator but for the auditor as well. 

Be transparent. We are all in this together. That includes the regulators. If you don’t know something, just ask. At the end of the day we are all working together to ensure that the industry solidifies itself and becomes successful for everyone.

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