A lapping scheme is a fraudulent practice where an employee manipulates accounts receivables to conceal stolen cash. This deceptive method involves using subsequent receivables payments to cover for the theft from earlier transactions, creating a chain of misallocated finances.
Key Takeaways
- A lapping scheme is an intentional act of accounting fraud where misappropriated cash is hidden by adjusting the accounts receivable records.
- A forensic auditing of cash receipts can uncover a lapping scheme, often indicated by aging accounts receivables.
- Companies can take proactive measures to prevent such fraud, including segregating duties and requiring employees to take mandatory vacations.
Detecting a Lapping Scheme
Lapping schemes can often be detected by tracing the application of cash receipts to customer accounts. Indicators include:
- Frequent misapplication of cash receipts to incorrect accounts.
- Employees who avoid taking earned vacation time to maintain the appearance of balanced records.
- An increase in the aging of accounts receivable, as consistent surpluses and shortfalls arise from partial applications of payments.
- Lapping schemes are more prevalent in smaller companies where one individual handles both cash receipts and customer billing.
Preventive Measures for Lapping Schemes
Implementing the following steps can significantly reduce the risk of a lapping scheme:
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Segregation of Duties: Separate responsibilities for cashier and billing functions to minimize individual control over the entire transaction process.
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Independent Statement Delivery: Ensure someone other than the cashier delivers customer statements, so discrepancies can be flagged independently.
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Customer Verification: Regularly check with customers to confirm they are receiving their statements and to detect any inconsistencies.
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Frequent Audits: Periodically audit cash receipts and related transactions to detect any unusual patterns.
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Mandatory Vacations: Enforce vacation policies to ensure no employee constantly oversees their responsibilities without interruption.
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Credit Memo Monitoring: Closely monitor the use of credit memos, as they may be used to cover fraudulent activities.
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Restrictive Endorsement: Mark all received checks with “For Deposit Only” to prevent deposit into unauthorized accounts.
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Lockbox Services: Require payments to be sent directly to a lockbox to eliminate money from employee handling.
Example of a Lapping Scheme
Imagine a company receives a payment of $150, but an accounting clerk diverts these funds to a personal account. To obscure the theft, the clerk applies a subsequent receivable, say $200, to cover the initial $150 receivable. This results in $50 leftover for the second transaction, which now gets a part payment and the remaining $150 goes unsettled. The clerk continues to apply funds from new transactions to old receivables, masking the ongoing discrepancies in the company’s financial records with each new transaction.
By implementing robust internal control measures as outlined, companies can protect their financial integrity and significantly diminish fraud risks associated with lapping schemes.
Related Terms: fraud, accounts receivable, aging of accounts receivable, forensic accounting.
