Lapping Scheme
A lapping scheme is a fraudulent practice that involves altering accounts receivables to hide stolen cash. Contact customers and inquire about whether or not they've been receiving monthly statements from the company (Whoever is committing the fraud may be intercepting the statements before they are mailed.) Audit cash receipts transactions on a regular basis Require all employees to take their vacation time, without exception Keep close track of the use of credit memos (The person committing fraud may try to end a lapping situation by writing off a receivable in the amount of the missing funds.) Companies can prevent lapping schemes by doing the following: Separating cashier and billing responsibilities (called segregation of duties) Electing someone other than the cashier to deliver statements to customers (Customers are aware of what they've paid, so they should be able to detect any incorrect payments connected to their accounts, or detect that certain payments were never applied.) A lapping scheme is a form of accounting fraud whereby stolen or misappropriated cash is obscured by altering the accounts receivable. A forensic accounting audit of cash receipts can be undertaken to reveal a lapping scheme, which may show increased age of accounts receivables.
What Is a Lapping Scheme?
A lapping scheme is a fraudulent practice that involves altering accounts receivables to hide stolen cash. The method involves taking a subsequent receivables payment from a transaction (for example, a sale) and using that to cover the theft. The receivable from the second transaction is covered by money from the third transaction, and so on.
How to Detect Lapping Schemes
A lapping scheme can be detected by tracing how cash receipts have been applied to customer accounts. If there is evidence that cash receipts are routinely being applied to the wrong customer accounts, then there is likely an active lapping scheme in progress.
Another indicator of a lapping scheme is an employee who refuses to take the vacation time they've earned. This is because lapping requires that the 'lapper' (the individual engaged in the fraud) is involved every day, and so is unable to take any vacation time. One telltale sign of lapping is a rise in the aging of accounts receivable. A lapping scheme can only temporarily hide the theft. Sooner or later, the shortfall will show up and have to be recorded as a loss.
Lapping schemes typically happen in smaller companies where only one person may handle cash receipts and customer billing.
How to Prevent Lapping Schemes
Companies can prevent lapping schemes by doing the following:
Example of a Lapping Scheme
Suppose that a company receives $150 for payment, but an accounting clerk diverts that to a personal account. To hide the theft, the clerk will apply the second receivable to come in, for example in the amount of $200, to the first receivable. That leaves $50 leftover to be applied to the second receivable, and $150 of it still to be paid. The clerk continues allocating (lapping) money from successive sales to the preceding receivables so the store's accounting records fail to reveal the discrepancy.
Related terms:
Accounts Receivable Aging
Accounts receivable aging is a report categorizing a company's accounts receivable according to the length of time an invoice has been outstanding. read more
Accounts Receivable (AR) & Example
Accounts receivable is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers. read more
Audit Trail
An audit trail tracks accounting data to its source for verification. Learn how companies use auditing to reconcile accounts and detect fraud. read more
Defalcation
Defalcation is the misuse of funds by a trustee but also refers to a flawed accounting practice of consolidating debt into a single, total debt. read more
Embezzlement
Embezzlement is a form of fraud wherein a person or entity intentionally misappropriates assets for personal use. read more
Financial Forensics
Financial forensics is a field that combines criminal investigation skills with financial auditing skills to identify criminal financial activity. read more
Fraud
Fraud, in a general sense, is purposeful deceit designed to provide the perpetrator with unlawful gain or to deny a right to a victim. read more
Petty Cash
Petty cash is a small amount of cash on hand used for paying expenses too small to merit writing a check. Learn how to balance petty cash in accounting. read more