Cannabis Financial Statement Audits in Canada Before and After Legalization: A “Joint” Analysis

• Published in: Journal of accounting and public policy 2023-11, Vol.42 (6), p.107153, Article 107153
• Main Authors: Brushwood, James D., Draeger, Michelle A., Rapley, Eric T.
• Format: Article
• Language: English
• Subjects: Audit Risk; Big 4 Auditor; Cannabis Legalization; Reputational Risk; Second-tier Auditor
• ISSN: 0278-4254
• DOI: 10.1016/j.jaccpubpol.2023.107153

Cannabis has become a multi-billion-dollar worldwide industry and presents accountants with unique challenges and opportunities. This descriptive study examines characteristics of financial statement audits for this budding industry in Canada, one of the first countries to legalize recreational adult use of cannabis. Consistent with cannabis audit clients having higher risk, we find they incur more audit fees before and after legalization than a matched sample of non-cannabis companies. Cannabis companies also pay more non-audit fees before and after legalization, consistent with additional business opportunities for their auditors. The size of cannabis companies grew substantially after Canada’s 2018 legalization, corresponding with increased occurrences of Big 4 cannabis company audits. However, compared to a matched sample of non-cannabis companies and controlling for size, cannabis companies are less (more) likely to be audited by a Big 4 (second-tier) firm. This observation is likely attributed to the reputation risk from being associated with a cannabis client, which is potentially higher for Big 4 firms than second-tier firms.