Lapping Scheme: How to Detect and Prevent

What Is a Lapping Scheme?

A lapping scheme is a fraudulent practice that involves an employee 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.

How to Prevent Lapping Schemes

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.)
• 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.)
• Mark all checks with the phrase "For Deposit Only," so that employees cannot deposit these checks to their own accounts
• Have customers pay directly to a lockbox, so that cash cannot be intercepted and stolen by employees

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.