Description of lapping schemes and internal controls to help avoid them

Fraud related to pocketing cash is not uncommon.†One of the ways to steal cash used by fraud perpetrators is lapping schemes.†In this article, we review how lapping schemes work and how they can be limited or prevented in your company.

1. How lapping schemes work

Lapping is a scheme whereby payments from a customer are stolen while other customersí payments (or subsequent payments from the customer) are used to hide the scheme by offsetting this customerís accounts receivable.

For example, letís assume that a person perpetrating a lapping scheme (e.g., A/R Clerk) receives customer payments and applies them to customer invoices.† Customer ABC has three outstanding invoices:

  • Invoice 111 (dated 2/1/20X4) = $1,200
  • Invoice 222 (dated 2/15/20X4) = $2,350
  • Invoice 333 (dated 3/5/20X4) = $895

On 4/1/20X4, Customer ABC sends a $1,200 payment to settle Invoice 111 and the A/R Clerk pockets (steals) the amount received.† Invoice 111 remains unpaid at this point and the fraud perpetrator has stolen $1,200.

Next, on 4/15/20X4, Customer ABC makes a second payment of $2,350 to settle Invoice 222.† The A/R Clerk applies $1,200 of $2,350 received to Invoice 111 and applies the remainder of $1,150 (i.e., $2,350 - $1,200) to Invoice 222.† At this point, Invoice 111 is paid in full and Invoice 222 has an outstanding balance of $1,200 (i.e., $2,350 - $1,150).

Finally, on 4/30/20X4, Customer ABC makes a third payment of $895 to settle Invoice 333.† The A/R Clerk applies $895 of the amount received to Invoice 222.† Now the outstanding balance of Invoice 222 is $305 (i.e., $1,200 - $895) and Invoice 333 has a full outstanding balance of $895.

This scheme can continue indefinitely and the fraud perpetrator can steal more and more from payments received from customers as the time goes by.† The fraud perpetrator can also use payments received from other customers to cover outstanding balances of the customer(s) whose payments have been stolen.

This fraud scheme is facilitated when the same employee (fraud perpetrator) is involved in day to day tasks related to cash handling and recording transactions (including accounts receivable transactions).† This scheme may also require the employee to work without taking vacation to ensure nobody uncovers the scheme.

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