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Aug. 11, 2019, 9:34 a.m. EDT

KPMG withdraws audits for CannTrust’s 2018 and March quarter after illegal grow scandal

Stock slides anew as auditor says reports can no longer be relied on in the wake of the scandal involving unlicensed cannabis grow

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By Ciara Linnane, MarketWatch


Bloomberg News/Landov
CannTrust’s facility at Fenwick, Ontario

Canadian cannabis company CannTrust Holdings Inc. said Friday its auditor KPMG is withdrawing its audits of the company’s financial statements for 2018 and the recent March quarter, saying they can no longer be relied on.

KPMG made the decision after a special committee shared newly uncovered information from an investigation that led to senior leadership changes announced on July 25. That was the day that Chief Executive Peter Aceto was fired for cause and President Eric Paul was forced to resign.

The special committee was formed to investigate the actions that led Health Canada to seize five metric tons of the company’s cannabis in July after discovering it was being grown in unlicensed rooms. The scandal quickly worsened after a whistleblower told Canadian newspaper the Globe and Mail that employees were instructed to construct false walls to conceal the illegal grow rooms.

The paper later uncovered emails that showed senior executives were aware of the illegal grow.Danish partner Stenocare A/S said a small batch of the illegal cannabis had been exported, a breach of Canadian drug laws that carries fines and a possible jail term.

See now: Aurora Cannabis weighs on sector after BofA downgrade highlights its cash burn

CannTrust voluntarily held back an additional 7.5 metric tons of weed and halted all medical and recreational cannabis sales in the wake of the Health Canada crackdown.

For a full timeline of this story, see: CannTrust fires CEO, president resigns as pot company deals with illegal-grow scandal

Related: Cannabis companies are having a horrible summer as scandals mount and stocks slide

“KPMG was not aware of the information recently shared by the Company when it issued the KPMG Reports and had relied upon representations made by individuals who are no longer at the Company,” CannTrust /zigman2/quotes/201332942/composite CTST -8.50%   /zigman2/quotes/206800806/delayed CA:TRST -8.59%  said in a statement.

Read now: Vape seller Greenlane rallies on news of Canopy deal, Cronos falls after earnings

The company said there is still “significant uncertainty” about the potential impact of Health Canada’s decisions on the valuation of its inventory and biological assets, and revenue recognition.

Investors should not rely on its 2018 financial report or on its March quarter report, it said.

See also: Failed marijuana experiment slams Organigram earnings

“We will continue cooperating with our auditor and regulators, and take whatever steps are necessary to restore full trust in the Company’s regulatory compliance. Our medical patients, customers, shareholders and employees deserve nothing less”, said Robert Marcovitch, the company’s new CEO.

Cannabis Watch: For all of MarketWatch’s coverage of cannabis companies

The news sent the stock down 2.2%. The stock has fallen 61% in three months, while the ETFMG Alternative Harvest ETF /zigman2/quotes/204332491/composite MJ -4.55% has fallen 16% and the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.08% has gained 2.4%.

See now: Short sellers are increasing bets that cannabis stocks will fall

/zigman2/quotes/201332942/composite
US : U.S.: NYSE
$ 0.89
-0.08 -8.50%
Volume: 2.12M
Nov. 14, 2019 6:30p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$137.62 million
Rev. per Employee
$133,643
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/zigman2/quotes/206800806/delayed
CA : Canada: Toronto
$ 1.17
-0.11 -8.59%
Volume: 1.03M
Nov. 14, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$181.10 million
Rev. per Employee
$171,989
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/zigman2/quotes/204332491/composite
US : U.S.: NYSE Arca
$ 17.19
-0.82 -4.55%
Volume: 1.67M
Nov. 14, 2019 8:00p
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/zigman2/quotes/210599714/realtime
US : S&P US
3,096.63
+2.59 +0.08%
Volume: 1.66B
Nov. 14, 2019 4:47p
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Ciara Linnane is MarketWatch's investing- and corporate-news editor. She is based in New York.

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