What is Lapping Fraud?

Lapping Fraud

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Lapping Fraud

Lapping is a type of fraud that involves manipulating accounts receivable to cover up the theft of cash. Here’s how it works:

  • An employee receives a cash payment from Customer A, but instead of recording the payment and depositing the money, the employee steals it.
  • Later, the employee receives a payment from Customer B. The employee records this payment as a payment from Customer A, covering up the fact that Customer A’s payment was never deposited.
  • The process continues, with each new payment being used to cover up the previous theft. Payment from Customer C is recorded as a payment from Customer B, and so on. This creates a cycle that can continue until the fraud is detected.

The term “lapping” comes from the overlapping nature of the fraud. It requires constant juggling of funds and can become increasingly complex as more payments are received.

Detecting lapping can be challenging because the total of accounts receivable remains correct; it’s just that the individual customer balances are incorrect. Techniques to detect lapping include independent reconciliation of accounts receivable, surprise audits, mandatory employee vacations (during which time irregularities may become apparent), and rotation of job duties.

Example of Lapping Fraud

Here’s an example of how lapping might occur in a business:

Let’s say you have an employee named Bob who is responsible for handling payments from customers at a small company.

  • On Monday, Bob receives a cash payment of $500 from Customer A. Instead of recording and depositing the payment, Bob decides to steal the cash.
  • On Tuesday, Bob receives a cash payment of $600 from Customer B. Bob records this in the company’s accounting system as a payment from Customer A.
  • On Wednesday, Bob receives a cash payment of $700 from Customer C. Bob records this as a payment from Customer B.
  • This process continues over time, with each new payment being misrecorded to cover the missing cash from the previous day.

From the outside, it may look like the company’s accounts receivable is in order, but in reality, Bob is using the incoming payments to cover his tracks and disguise the theft of the original $500. The fraud continues until either Bob slips up and can’t cover a theft, or an independent audit uncovers the irregularities.

It’s important to note that while lapping can keep the total accounts receivable correct, the individual customer balances will be inaccurate. If a customer scrutinizes their account or an audit is conducted, the discrepancies will become apparent and the fraud may be exposed.

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