Lapping Scheme

A lapping scheme is a type of accounting fraud in which an employee conceals stolen cash by misapplying subsequent customer payments to earlier unpaid accounts. Each new payment is used to cover a previous shortfall, creating a rolling mismatch that temporarily hides theft until the pattern collapses or is discovered.

How lapping works

• Customer A pays an invoice, but the payment is stolen.
• The clerk applies Customer B’s payment to Customer A’s account to conceal the theft.
• Customer B’s account is then covered with Customer C’s payment, and so on.
• The cycle continues until the shortfall becomes large enough to surface or is exposed by audit procedures.

Key signs of a lapping scheme

• Frequent misapplication of cash receipts to customer accounts.
• Increasing aging of accounts receivable (older unpaid invoices grow).
• One employee consistently handling all cash receipts and billing tasks.
• An employee who declines or avoids taking vacation time (the scheme often requires daily intervention).
• Unusual use of credit memos or write-offs that coincide with timing of missing funds.
• Customers report not receiving statements, or they note payments not reflected correctly.

How to detect lapping

• Trace cash receipts: match bank deposits to customer remittances and applied receipts in the ledger.
• Review the sequence of payments applied to accounts to identify “missing” funds being covered by subsequent receipts.
• Analyze accounts receivable aging to spot unusual increases or patterns localized to certain accounts or staff.
• Require periodic, independent review of cash handling by someone not involved in daily receipts.
• Use surprise audits and reconcile lockbox deposits (if applicable) against posted receipts.

How to prevent lapping

• Segregate duties: separate cash receiving, recording, and reconciliations among different employees.
• Have someone other than the cashier mail customer statements and handle customer inquiries about payments.
• Encourage and enforce mandatory vacation for staff involved with cash handling so cover-ups are more likely to be revealed.
• Require independent, regular audits of cash receipts and accounts receivable reconciliations.
• Use lockbox arrangements or direct bank deposits so customer payments bypass internal staff handling.
• Stamp checks “For Deposit Only” to reduce the risk of diversion to personal accounts.
• Monitor and control the issuance and approval of credit memos and write-offs.

Example

A company receives:
– $150 from Customer A — the clerk diverts it to a personal account.
– $200 from Customer B — the clerk posts $150 of this to Customer A, leaving $50 for Customer B.
– $300 from Customer C — the clerk posts $50 to Customer B and $250 to cover other shortfalls.

This shifting of funds continues until an audit, customer complaint, or aging analysis reveals discrepancies.

Summary

Lapping schemes exploit weak internal controls and concentrated cash-handling responsibilities. Regular independent reconciliations, segregation of duties, customer statement controls, mandatory staff vacations, and lockbox arrangements are practical measures that make lapping difficult to execute and easier to detect.