Rampant Restaurant Fraud

The Canada Revenue Agency released some details of their 3-year pilot study (it was only supposed to run two years) of fraud in the restaurant industry.  While not many details were released, you can read the Globe and Mail article, Taxman finds rampant restaurant fraud.

The media’s interpretation of the details that were released is a bit misleading.  Of the 424 restaurants that were subject to scrutiny, it was determined that 143 of them exhibited evidence of fraud by erasing evidence of cash sales from their electronic POS systems.  This is how they arrive at the “one-third” of all restaurants fraudulently hide sales from the taxman. Further, almost $1 million of hidden sales were revealed for each fraudulent establishment ($141 million).

So what’s misleading about that?

For starters, the restaurants in the pilot study are not representative of the restaurant industry across Canada.  Given the high dollar amount of fraud found (average $1 million), it is clear that these were fairly large operations, with many staff employed.  Zappers are much more likely to be employed in a large operation, because other forms of skimming cash from the till are too obvious to most employees.  Employees who become aware of owner/manager fraud see it as a “green light” to steal from the establishment.  Alternatively, they may report the owner to the CRA for tax evasion.  Not a risk that most restaurateurs would consider taking.  So, they have do carryout the fraud behind closed doors, after all the sales have been properly accounted for in the POS system.

Also, the vast majority of restaurants don’t have $1 million of sales that could have been suppressed.  These establishments must have had very significant cash sales, in order to zap them from the POS system.  Many restaurants, especially those in the fine dining category, accept credit or debit cards for the vast majority of their sales transactions.

The CRA study did not include restaurants in Quebec.  Over the last 14 years, the Ministry of Revenu Quebec has uncovered over 200 cases of zapper use, and they are the world leaders in zapper detection and prosecution!  More evidence of a highly skewed sample in the CRA study.

On the other hand, the study appears to have focused almost entirely on the use of zappers in the restaurant industry.  Of course, there are other methods of skimming cash from sales, and in fact, the majority of unreported sales in the restaurant industry is perpetrated without the use of zappers.

It is interesting that Quebec has decided to require most restaurants to install a Sales Recording Module (SRM) to capture all sales transactions as they are recorded, making it all but impossible to utilize a zapper or other method to hide sales.  Undoubtedly, they considered the ridiculously high cost of auditing restaurants with zappers to uncover unreported sales and decided it was far less expensive to provide free SRMs to the restaurants.

Unless the CRA decides to go the same route as Quebec, they will find the cost of auditing restaurants prohibitive.  Not only that, but they don’t have nearly enough sufficiently trained computer auditors to detect the use of zappers and identify the amount of unreported sales.  Even worse, as I have written before, if the CRA intends to use a SRM to verify all sales, they will not be able to use indirect audit methods to generate huge tax assessments that result from theft, over-pouring, spillage, and discounts.  These are the true “phantom” sales!

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