Lapping fraud

Lapping occurs when an employee steals cash by diverting a payment from one customer, and then hides the theft by diverting cash from another customer to offset the receivable from the first customer. This type of fraud can be conducted in perpetuity, since newer payments are continually being used to pay for older debts, so that no receivable involved in the fraud ever appears to be that old.

Lapping is most easily engaged in when just one employee is involved in all cash handling and recordation tasks. This situation most commonly arises in a smaller business, where a bookkeeper may be responsible for all accounting tasks.

If these tasks are split up amongst several people (known as the segregation of duties), then lapping can only be conducted when two or more employees are involved. Lapping typically requires that the person engaged in the fraud be involved every day, and so does not take any vacation time. Thus, having a person refuse to take the vacation time that they have earned can be considered a possible indicator of the existence of lapping.

Lapping can be detected by conducted a periodic review of the cash receipts records, to trace payments to outstanding receivables. If there is ongoing evidence that cash receipts are routinely being applied against the wrong customer accounts, then either the cashier is astonishingly incompetent, or there is an active lapping scheme in progress.

Controls that can be used to prevent or detect lapping include the following:

  • Have someone other than the cashier send statements to customers. Customers know what they paid to the company, so they should be able to detect unusual payments ascribed to their accounts, or note that certain payments were never applied against their accounts.
  • Contact customers and ask if they have received monthly statements from the company. The responsible party may have been intercepting and destroying the statements before they were mailed.
  • Audit cash receipts transactions on a regular basis, as noted above.
  • Require all employees in the accounting area to take all of their vacation time, without exception.
  • Track the days of accounts receivable on a trend line. A gradual increase in this measurement can be caused by lapping.
  • Tightly control the use of credit memos. A party committing fraud may attempt to terminate a lapping situation by writing off a receivable in the amount of the missing funds.
  • Stamp all checks with "For Deposit Only," so that employees cannot deposit these checks to their own accounts.
  • Have customers pay directly to a lock box, so that cash cannot be intercepted and stolen by employees.