What is Lapping?
Lapping is an asset misappropriations fraud scheme and is one of the most common methods of concealing receivables skimming. Lapping is the fraudster’s version of “robbing Peter to pay Paul”. It is the extraction of money from one account to cover shortages in another account. For example, customer A’s payment comes in and the employee takes the payment for themselves. When customer B’s payment comes in, it is applied to A’s account. When customer C’s payment arrives, it is applied to B’s account, and so on.
Over time, lapping is difficult for the dishonest employee to keep track of. As a result, almost all lapping schemes quickly reveal themselves. Additionally, since lapping schemes can become very intricate, fraudsters sometimes keep a second set of books on hand detailing the true nature of the payments received. While it may seem odd that people would keep records of their illegal activity on hand, many lapping schemes become extremely complicated as more and more payments are misapplied. The second set of records helps the perpetrator keep track of the funds that were stolen and which accounts need to be credited to conceal the fraud. Uncovering these records, if they exist, will greatly facilitate the investigation of a lapping scheme.
Red flags to look for:
- Excessive billing errors.
- Slowing accounts receivable turnover.
- Excessive write offs of accounts receivable.
- Delays in posting customer payments.
- Accounts receivable detail does not agree with general ledger.
- A trend of decreasing payments on accounts receivable.
- Customer complaints.
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