What is a Lapping Scheme?

A lapping scheme is a type of accounting fraud in which stolen or misappropriated cash is concealed by an employee who manipulates the accounts receivable. The purpose of the scheme is to “lap” previous unpaid invoices with current ones, thus hiding the missing money by making it appear as though funds are being received from customers.

How Does it Work?

Lapping schemes can work in several ways, but the concept remains the same; funds are shifted from one account to another in order to cover up the fact that money is missing. In many cases, the scheme begins when an employee takes cash from a customer’s payment and then applies the payment to the customer’s oldest outstanding invoices rather than the most recent ones. The result is that new invoices are created more quickly but older accounts receivable don’t get paid. This process is known as "lapping."

What are the Signs and Effects of a Lapping Scheme?

The effects of a lapping scheme can be difficult to detect, but there are certain red flags that may indicate it is in play. For example, if a company’s accounts receivable is growing unusually quickly or staying at a higher level than usual, this may be an indication of a lapping scam. In addition, if collection cycles are suddenly accelerating, or customers seem to be paying more than their usual balance, these may all be signs of lapping.

Aside from the direct financial losses suffered by the company, lapping schemes can also damage the public’s trust in the business, which can lead to reputational issues as well as loss of sales and customers.

How to Prevent a Lapping Scheme?

The best way to prevent a lapping scheme from occurring is to have proper internal controls in place to detect fraud and limit the opportunity of the scheme happening. This includes setting up procedures for the proper coding and recording of customer payments, ensuring that the payment amount is always recorded in the same way, and setting up regular spot audits to check for any discrepancies or suspicious activity. As well, it is important for companies to monitor employees for access to greater amounts of money than what is required for their job.

In summary, a lapping scheme is a form of accounting fraud in which stolen or misappropriated cash is obscured by an employee who alters the accounts receivable. It is important for companies to be aware of the warning signs of lapping and to have proper internal control procedures in place in order to detect and prevent the scheme from taking place.