What is a 'Lapping Scheme'

A lapping scheme is a fraudulent practice that involves altering accounts receivables to hide a stolen receivables payment. The method involves taking a subsequent receivables payment and using that to cover the cover the theft. The next receivable is then applied to the previous unpaid receivable, and so on.

BREAKING DOWN 'Lapping Scheme'

Lapping schemes typically happen in smaller companies where only one person may handle cash receipts and customer billing. Companies can prevent lapping by conducting regular audits of cash receipts, and by separating cashier and billing responsibilities. The scheme can be detected by tracing how cash receipts have been applied to customer accounts. One telltale sign of lapping is a rise in the aging of accounts receivable. A lapping scheme can only temporarily hide the theft. Sooner or later, the shortfall shows up and is recorded as a loss.

Example of a Lapping Scheme

For example, assume that a company receives $150 in payment, but an accounting clerk diverts that to a personal account. To hide the theft, the clerk will apply the second receivable to come in, say $200, to the first receivable. That leaves $50 leftover to be applied to the second receivable and $150 of it still to be paid. The third payment will then be applied to cover the remaining balance on the second, the fourth will cover the third, the fifth will cover the fourth, and so on.

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