Definition
Lapping is a type of accounting fraud that involves delaying the recording of cash receipts to conceal a shortage of funds. Typically, this occurs when an employee appropriates cash from one transaction and covers it using funds from subsequent transactions. This process requires continual manipulation of the accounting records to hide the initial theft, creating a cycle that becomes increasingly difficult to maintain over time. In the UK, this practice is sometimes referred to as teeming and lading.
Detailed Explanation
The scheme generally works as follows:
- The cashier or employee responsible for handling cash receives payment from Customer A but decides to steal it instead of recording it.
- A subsequent payment from Customer B is then recorded as the payment from Customer A.
- The pattern continues as the payment from Customer C is recorded as that of Customer B, and so forth.
- The fraud is sustained by continually substituting payments from new customers to cover missing funds from earlier transactions.
This deceitful cycle creates a risk management nightmare as the employee relies on maintaining the flow of cash receipts uninterrupted, which is usually unsustainable and often results in detection. Generally, lapping schemes collapse when the responsible party is unable to cover for the missing funds, leading to discrepancies in the accounts.
Examples
Example 1
- Scenario: Jane, who works as a cashier, receives $500 from Customer A. Instead of recording the transaction, Jane pockets the cash. She then receives $700 from Customer B and enters $500 of this payment as from Customer A.
- Outcome: The fraud continues with Jane needing constantly to cover each previous customer’s payment with the next one, eventually leading to detection when she can no longer maintain the discrepancies.
Example 2
- Scenario: Joe, an accounts receivable clerk, steals money received from Customer X. To cover up the theft, he uses a payment received from Customer Y to account for Customer X’s transaction.
- Outcome: Joe finds himself continually using payments from new customers to cover for previous thefts. Eventually, the fraud is discovered when a thorough audit is performed.
Frequently Asked Questions (FAQs)
Q1: How can businesses detect lapping fraud?
A1: Businesses can detect lapping fraud by implementing and maintaining strong internal controls, performing regular audits, reconciling accounts frequently, and requiring mandatory vacations and job rotations to prevent an employee from continuously manipulating records.
Q2: Are there specific warning signs of lapping?
A2: Yes, warning signs include unusual delays in account postings, customer complaints about discrepancies in their accounts, frequent write-offs or adjustments, and unexpected increases in accounts receivable aging balances.
Q3: Who is typically responsible for lapping within a company?
A3: Lapping is usually perpetrated by employees who have access to both the receipt and recording of customer payments, often in roles handling cash receipts and accounts receivable.
Q4: What measures can prevent lapping?
A4: Preventive measures include segregation of duties, rotating personnel, establishing comprehensive internal controls, conducting regular audits, and ensuring robust oversight mechanisms are in place.
Q5: How is lapping different from other types of accounting fraud?
A5: Lapping specifically involves the concealment of cash theft by using subsequent receipts to cover earlier thefts, unlike other types of frauds that might involve falsifying entire financial statements or engaging in unauthorized transactions.
Related Terms with Definitions
Embezzlement
Embezzlement: The misappropriation or theft of funds placed in one’s trust or belonging to one’s employer.
Internal Controls
Internal Controls: Procedures and mechanisms put in place by a company to ensure the integrity of financial and accounting information, promote accountability, and prevent fraud.
Teeming and Lading
Teeming and Lading: A British term similar to lapping, involving the concealment of cash shortages by using funds from subsequent transactions to cover earlier thefts.
Accounts Receivable
Accounts Receivable: Money owed to a company by its customers for products or services delivered but not yet paid for.
Audit
Audit: An official inspection of an individual’s or organization’s accounts, typically by an independent body, to ensure accuracy and compliance with regulations.
Online References
Suggested Books for Further Studies
- “Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports” by Howard M. Schilit
- “Principles of Fraud Examination” by Joseph T. Wells
- “Forensic and Investigative Accounting” by D. Larry Crumbley and Lester E. Heitger
- “Essentials of Forensic Accounting” by Michael A. Crain, William S. Hopwood, George R. Young, and Carl Pacini
Accounting Basics: Lapping Fundamentals Quiz
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