Lapping of Accounts Receivable is a fraudulent practice that involves manipulating and misrepresenting financial transactions within an organization’s accounts receivable system. This scheme typically occurs in businesses where cash receipts are received and recorded by a single individual, such as a cashier or accounts receivable clerk. The lapping process allows the perpetrator to conceal theft or embezzlement by covering up their tracks and delaying the detection of missing funds.
To execute the lapping scheme, the dishonest employee diverts incoming payments from customers and applies them to their own accounts or those of previous customers who have outstanding balances. By doing so, the employee ensures that the accounts receivable ledger remains balanced, disguising any discrepancies or abnormalities from management’s attention.
The lapping process typically occurs in a cycle, with each subsequent payment used to cover the shortfall caused by the diverted funds. This can continue for an extended period, allowing the perpetrator to maintain the appearance of a functioning accounts receivable system while siphoning off funds for personal gain.
One way lapping can be carried out is by altering payment records through various means, such as adjusting payment dates or amounts received. The fraudulent employee may also manipulate customer account information to ensure the diversion of funds goes unnoticed. Lapping schemes can become increasingly complex as the perpetrator attempts to cover their tracks and prevent the discovery of their illegal activities.
Detecting lapping schemes can be challenging, as they involve deliberate efforts to deceive and conceal financial irregularities. However, there are several red flags that organizations can look out for to identify potential lapping activities. These may include unexplained changes in payment patterns, discrepancies between cash receipts and customer accounts, and a repetitive or unusual sequence of payment adjustments. Regular monitoring of accounts receivable records and cross-checking payment information against customer invoices can help organizations detect and prevent lapping schemes.
To mitigate the risk of lapping, organizations should implement strong internal controls and segregation of duties within their accounts receivable processes. This includes separating the responsibilities of cash handling, payment recording, and account reconciliation among different employees. Regular independent audits can also help identify control weaknesses and provide an opportunity to reinforce procedures that deter and expose fraudulent activities like lapping.
In the event that lapping is suspected or detected, organizations should take immediate action to investigate the matter thoroughly. This involves conducting a forensic examination of financial records, interviewing relevant personnel, and, if necessary, involving law enforcement authorities. Additionally, implementing stricter internal controls and enhancing fraud awareness training can help prevent future occurrences of lapping and other fraudulent activities within an organization.
In conclusion, lapping of Accounts Receivable is a deceptive practice where an employee manipulates payment records to misappropriate funds. This fraudulent scheme can be damaging to organizations, leading to financial loss and reputational damage. By implementing adequate internal controls, conducting regular audits, and promoting a culture of integrity, organizations can reduce the risk of lapping and protect their financial interests.