Don’t Let Lapping Fraud Run Circles Around Your Business

Lapping is the illegal form of “robbing Peter to pay Paul.” Essentially it is a common method of skimming money from a company by using receipts from one account to cover theft from another. Learn how to spot this method of fraud to protect your business.

Spot the scheme

Lapping scams usually start small, with an employee pocketing a payment from ABC company and using a payment from XYZ company to hide the loss. As time goes on, however, the amounts get larger and the employee must maintain detailed records to track the movement of money.

This house of cards usually tumbles when the employee makes an error. For example, one man who stole $150,000 by programming an elaborate computer scam based on 29-day cycles forgot that February has only 28 days (except in a leap year). The scheme collapsed and he was discovered.

There usually are warning signs that can alert you before a lapping problem grows to epic proportions. Such signs include:

• Excessive billing errors
• Accounts receivable write-offs
• Delays in posting customer payments
• Customer complaints
• A trend of decreasing accounts receivable payments
• Accounts receivable details that don’t tally with the general ledger

Effective controls

Most of the time, lapping is a sign not only of a cash-strapped employee but also of a company with inadequate internal controls. To ensure lapping doesn’t tempt fraudsters, take preventive measures.

Have someone review and compare every check that’s deposited to the receivables ledger. Better yet, require that two people review the records. The review should include the actual checks — not just ledgers. Because employees who are lapping may set up their own accounts in the company’s bank, it’s important for reviewers to have a list of valid accounts by bank name and number for authentication.

Another relatively easy protection is to closely monitor aging accounts. If you routinely send overdue notices to customers, pay attention to the responses. Follow up immediately if customers say they’ve already paid an invoice.

Contact us

Lapping can be a tempting form of “easy money” for some employees, but vigilance will go a long way toward preventing this type of fraud. If you have questions about prevention measures or are worried about potential fraud in your business, JLK Rosenberger can help. For more information, call us at 949-860-9902 or click here to contact us.

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