By Lapping is a fraudulent accounting practice where an employee misappropriated customer payments and covers up the theft by using subsequent payments to replace missing funds. This type of fraud is most common in accounts receivable departments and can go unnoticed for long periods if proper controls are not in place.
- In this article, we’ll cover:
What lapping in accounting means
How lapping schemes work
Real-world examples of lapping fraud
How to detect and prevent lapping in a business
What is Lapping in Accounting?
Lapping occurs when an employee steals a payment meant for one account and then uses funds from another account to cover the missing amount. This process is continuously repeated to conceal the initial theft, creating a fraudulent cycle of misappropriation.
Key Characteristics of Lapping:
- Involves manipulating customer payments.
Typically occurs in cash or accounts receivable transactions.
Fraud continues until detected or until the perpetrator can no longer keep up with covering the stolen funds.
Example: An employee in charge of accounts receivable steals a $5,000 payment from Client A. To cover up the missing amount, they use a later payment from Client B to record Client A’s payment. The fraud continues as later payments are misused to cover the missing money.
How Does Lapping Work?
Lapping schemes rely on constant movement of stolen funds. Here’s how the process typically unfolds:
- Step 1: Employee Steals Payment – An employee pockets a customer’s payment instead of recording it.
Step 2: Use Another Payment to Cover Up – The employee then applies a later payment from a different customer to hide the missing funds.
Step 3: The Cycle Repeats – Payments from new customers continue to be used to cover previous shortages.
Step 4: Fraud Is Either Detected or Becomes Unsustainable – Eventually, the scheme is uncovered when: - A customer notices an incorrect balance.
- An audit reveals discrepancies.
- The employee can no longer keep up with the scheme.
Fact: Lapping is often considered an ongoing fraud rather than a one-time theft, as it requires constant manipulation of accounts to avoid detection.
Real-World Example of Lapping Fraud
- A company’s accounts receivable clerk was responsible for handling customer payments.
They stole payments from multiple accounts over a period of six months.
The employee used new customer payments to cover missing funds, keeping the fraud hidden.
The fraud was discovered when a customer complained about being overcharged, triggering an internal audit.
The company suffered a $50,000 financial loss, and the employee faced legal action.
Lesson: Businesses must implement strong internal controls to prevent and detect lapping fraud.
How to Detect Lapping in Accounting
- Compare Cash Receipts with Accounts Receivable Records
If payments recorded don’t match actual deposits, lapping may be occurring. - Monitor Customer Complaints About Incorrect Balances
If customers report unapplied payments or unusual delays, investigate further. - Conduct Surprise Audits & Employee Rotation
Regular surprise audits can reveal inconsistencies.
Rotating employees handling accounts receivable reduces fraud risk. - Review Accounts Receivable Aging Reports
Lapping often leads to inconsistencies in aging reports, where older balances remain unpaid while new ones are covered. - Use Segregation of Duties
Ensure different employees handle cash, record payments, and reconcile accounts to prevent fraud.
How to Prevent Lapping in a Business
- Implement Strong Internal Controls
Require daily reconciliation of accounts.
Use automated payment processing to minimize manual handling of cash. - Enforce Employee Rotation & Mandatory Vacations
Fraudulent employees avoid vacations to keep covering their tracks.
Regular rotation of duties prevents one person from controlling all financial transactions. - Monitor Customer Accounts for Irregularities
Track customer complaints about missing payments.
Verify all receivables against bank deposits. - Use Independent Audits
Conduct random audits of financial records.
Have an external CPA review company accounts regularly. - Implement a Whistleblower Policy
Encourage employees to report suspicious financial activities.
Maintain confidentiality and protection for whistleblowers.
Pro Tip: Companies that actively monitor cash transactions and implement strong financial policies significantly reduce the risk of lapping fraud.
Conclusion
Lapping fraud can cause serious financial and legal consequences for businesses. It not only affects financial stability but also damages trust with customers and stakeholders.
- Key Takeaways:
Lapping involves stealing customer payments and covering up with new ones.
Common in accounts receivable departments handling cash transactions.
Regular audits, employee rotation, and segregation of duties help prevent fraud.
Strong internal controls and digital payment tracking minimize the risk.
Is your business protected against lapping fraud? Implement these strategies today and safeguard your financial integrity!
FAQs
1. What is lapping in accounting?
Lapping is a fraudulent accounting scheme where an employee steals a customer’s payment and uses later payments from other customers to cover the theft.
2. Why is lapping illegal?
- It involves intentional financial misrepresentation.
It leads to incorrect accounting records.
It violates business ethics and financial regulations.
3. How can companies prevent lapping fraud?
- Segregate duties (different employees handle payments, recording, and reconciliation).
Conduct surprise audits to detect irregularities.
Use automated accounting systems to track all transactions accurately.
4. What’s the difference between lapping and embezzlement?
- Lapping is a cover-up scheme that involves constantly shifting funds to hide theft.
Embezzlement is outright theft of funds without attempting to conceal it through accounting manipulations.
5. Can lapping happen in digital transactions?
- Yes! Lapping can occur in online payments and digital transactions if proper oversight is lacking.
Automated systems reduce the risk but don’t eliminate it completely.
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