Investors need to watch the accounting on weed stocks

Jan 28 16:01 2018 Print This Article

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Depending on your point of view, the burgeoning marijuana industry in Canada is either an unprecedented opportunity to rake in huge profits as recreational use becomes legal, or a speculative bubble that will eventually pop. When forensic accountant Al Rosen looks at the sector, he sees something else: “It’s a bloody mess,” he says.

Rosen is referring to the financial statements of the country’s publicly traded licensed producers. Accountability Research Corp., which Rosen runs with his son, Mark, is warning those statements are misleading and allow companies to overstate profitability. “Canadian reporting of marijuana growers sets a new low for integrity,” the Rosens wrote in a recent report. It’s not that companies are intentionally duping investors—though there is ample opportunity for that, the Rosens argue. Instead, companies are trying to apply already-vague accounting rules to a new industry. Companies have to put a value on their marijuana plants for accounting purposes, even though pricing and future demand are not yet known. As a result, the Rosens charge, financial statements rely heavily on managers’ estimates, and are wildly inconsistent.

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Money Sense

MoneySense is a Canadian personal finance and lifestyle magazine published by Rogers Publishing Limited, a division of Rogers Communications.Written for Canadians who want to take financial control of their lives, MoneySense is Canada's best-selling investment and lifestyle magazine, helping readers make smart, informed decisions about how to get the most from their money. The magazine has received many awards, including multiple National Magazine Awards and CFA Society Toronto Awards.

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