Toronto-based cannabis company censured over accounting fraud

Multiple breaches and an undisclosed oral agreement found after internal investigation.

Violation of antifraud, reporting, books and records, and internal controls provisions of federal securities laws have led to accounting fraud charges against Toronto-based cannabis company Cronos Group Inc and a three-year officer and director bar for its former Chief Commercial Officer.

The US Securities and Exchange Commission (SEC) found material errors relating to revenue recognition and goodwill impairment, among other things, in financial statements for three separate quarters. Cronos’s former CCO William Hilson was also found to have entered into an undisclosed oral agreement to sell cannabis raw material and repurchase cannabis product in the following quarter.

$2.3m error

Nasdaq-listed Cronos discovered the $2.3m accounting error during an internal investigation. It reported it promptly to the SEC, “provided extensive cooperation that meaningfully advanced the Commission’s investigation” and took effective steps to improve internal controls. This contributed to the SEC’s decision not to impose a financial penalty.

Hilson was charged with contravening the antifraud provisions of federal securities laws and aiding, abetting and further causing Cronos’s violations.

Settle the matter

Without admitting or denying the SEC’s findings, Cronos and Hilson offered to settle the matter by agreeing to cease and desist from future violations of the charged provisions. Cronos has also agreed to take on an independent compliance consultant to help it improve its processes, while Hilson agreed to a three-year officer and director bar and suspension from appearing before the SEC as a practicing accountant. He also agreed to pay approximately $54,000 to the Ontario Securities commission for similar conduct.

“It is critically important for issuers to have adequate controls in place before they take on the reporting obligations required of public companies,” said Mark Cave, Associate Director in the SEC’s Enforcement Division.