What Is a Lapping Scheme?
Let me explain what a lapping scheme is—it's a fraudulent practice where an employee alters accounts receivable to hide stolen cash. You see, the method works by taking a payment from a later transaction, like a sale, and using it to cover the initial theft. Then, the receivable from that second transaction gets covered by money from the third one, and this chain continues.
Key Takeaways
Understand that a lapping scheme is essentially accounting fraud where an employee obscures stolen or misappropriated cash by altering accounts receivable. If you're looking to uncover one, a forensic accounting audit of cash receipts can reveal it, often showing an increased age of accounts receivable. And remember, your company can implement simple steps to prevent this kind of fraud from taking root in the workplace.
How to Detect Lapping Schemes
You can detect a lapping scheme by tracing how cash receipts are applied to customer accounts. If you find evidence that receipts are routinely going to the wrong accounts, that's a strong sign of an active scheme. Another red flag is an employee who never takes their earned vacation time—lapping requires daily involvement, so the fraudster can't afford to be away. Watch for a rise in the aging of accounts receivable too; this scheme only hides the theft temporarily, and eventually, the shortfall will appear as a loss. Keep in mind, these schemes often occur in smaller companies where one person handles both cash receipts and customer billing.
How to Prevent Lapping Schemes
To prevent lapping schemes, start by separating cashier and billing responsibilities—this is known as segregation of duties. Have someone other than the cashier deliver statements to customers, since customers know what they've paid and can spot incorrect applications or missing credits. You should also contact customers directly to confirm they're receiving monthly statements, as the fraudster might be intercepting them. Make it a point to audit cash receipts transactions regularly and require all employees to take their vacation time without exceptions. Track the use of credit memos closely, because a fraudster might try to write off a receivable to cover missing funds. Additionally, mark all checks with 'For Deposit Only' to prevent employees from depositing them into personal accounts, and have customers pay directly to a lockbox so cash can't be intercepted by employees.
Example of a Lapping Scheme
Suppose a company receives $150 as payment, but an accounting clerk diverts it to a personal account. To hide this, the clerk applies the next receivable, say $200, to the first one—leaving $50 for the second and $150 still owed. The clerk keeps lapping money from successive sales to prior receivables, so the company's records don't show the discrepancy right away.
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