In both electronic and manual accounting systems the arrangements for recording cash received at the point of sale are important for ensuring that all sales made and cash received are correctly recorded. Much attention has been given to manual systems in businesses making cash sales such as those in the retail sector, and the necessity for complete and accurate recording of the transactions at the point of sale. Often less attention has been paid to electronic point of sales systems but these may be equipped with electronic sales suppression software to facilitate tax evasion by the business making the sales.
The OECD’s Task Force on Tax Crimes and Other Crimes has been working on the problem of electronic sales suppression and has begun to raise awareness of the problem. A report has now been issued looking at the types of system used to suppress recorded sales and pointing out the main risk areas. The report looks at specific systems and how the tax auditor can detect them, but warns that more sophisticated sales suppression systems are being developed.
Electronic sales suppression may be carried out by the installation of software (known as Phantomware) in the point of sales system itself, or by using external programs called Zappers that are carried on removable media such as a USB key. The point of sales system would operate normally during the business day and the software would enable the business owner at a convenient time to perform the operation to suppress a certain monetary quantity or percentage of sales. The business owner would access the sales suppression system through a swipe card or a hidden button on the screen.
Detection of the use of such systems may begin with traditional audit methods such as looking at the private consumption of the business owner, looking for negative cash flows that would indicate unrecorded cash inputs, or analyzing the quantities of stock bought and sold to detect missing sales. Analysis of the ratio of operating cash flow to net sales would be a possible indicator of evasion if the ratio is lower than expected in the particular sector. Where the electronic cash register is linked to other electronic systems of the business there could be anomalies in the results from other areas such as stock control that would give rise to questions. An auditor could also perform covert operations to observe the business during the working day or use a pretext to obtain copies of the software for analysis.
The detection of the use of sales suppression software also requires the input of electronic commerce audit specialists using computer assisted audit tools and techniques. Where necessary the point of sales system may be seized and subject to computer forensic investigation. Other related systems used by the business may also be subject to forensic investigation.
The OECD report recommends that governments obtain the cooperation of industry bodies to encourage voluntary cooperation from taxpayers, improve the investigative skills of tax auditors for detecting these systems and share information on technical solutions to the problem. Awareness of the electronic sales suppression systems needs to be spread from governments to other stakeholders such as the suppliers of point of sales systems. Another important stakeholder is the public who may be customers of the retail outlets using sales suppression software and who have an interest in ensuring that the government collects the correct amount of tax from retail businesses.
The report suggests that governments should consider recruiting specialist e-auditors to combat the problem, and equipping them with the appropriate skills. They also need to review the legal situation and make sure that the law is keeping up with developments in business so electronic sales suppression systems can be investigated thoroughly by the auditors. The report also suggests that tax administrations may need to put forward proposals for changes in the law so that the possession of sales suppression systems is a criminal offence.
