A lapping scheme definition refers to fraudulent activity, in which the individual modifies the account Receivables and input the wrong information to hide the amount they have stolen from the company. In a lapping scheme, the person collects a significant amount of payments from the customer and uses another transaction to hide the money they stole from the first transaction. They keep altering the records so that the Accountant fails to detect the discrepancy.
Sooner or later, the discrepancy is discovered as the account receivables will show a negative balance or a loss. Here, the main issue is to locate the transaction that led to a negative balance. In other words, the person stealing money from the transactions alter the account receivable records to hide the fraudulent practice. They keep adding the money they receive from the successive transaction to the preceding transaction to hide the discrepancy. Let’s understand the concept with an illustration.
Suppose an employee of your company sells a product worth Rs. 100 to a customer. Instead of adding it to the bill receivables of the company, they steal it. This employee sells another product worth Rs. 200 to a new customer. Now, they mention the Rs. 100 from this sale in the bills receivables of the first transaction. The remaining Rs. 100 are added to the bill receivables of the second transaction to partially cover the second customers’ open receivables.
This employee keeps using the money they make from the sale of the products to partially Offset the previous receivables. This makes it difficult for the accountant and the company to locate the loss in the transaction. This fraudulent practice that is used to hide the stolen money from the firm’s accounts is known as a lapping scheme.
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The only way to find out this fraudulent practice is by matching the cash receipts of each customer with their respective accounts. If you notice the cash receipts of a customer applied to other customers’ accounts, then that is a sign the seller is following the lapping scheme. Mistakes are quite common in Accounting, but if you see a pattern in the wrong receipts being applied to the customer accounts, then someone from your company is definitely using the lapping scheme.
Some other signs that may indicate the lapping scheme in progress is the employee declining the vacation they deserve. There is a chance the employee enjoys the work. However, if they don’t take a single day-off, then it is time to check the records. The lapping scheme, as the name suggests, needs to be practiced every day. They have to make transactions every day to offset the previous receivables. Note that the lapping scheme will be recorded as the loss in the books of accounts, if it isn’t recovered.
As mentioned before, it is difficult to locate the loss. The best way to avoid the lapping scheme is by conducting regular cash receipts audits. You must also hire separate employees for billing and accounting jobs.