What is lapping?
Lapping is a fraudulent accounting techniques that occurs when an employee alters the financial records to hide cash stolen from the company. Basically, the employee will take subsequent cash received and apply it to an accounts receivable to cover the theft. The employee must keep up this practice, otherwise the fraud will be discovered.
As you can see below, the fraudster employee would take the payment from Customer A. However, to cover the invoice for Customer A, they would take the payment from Customer B. Then for Customer B’s invoice, they would use the payment for Customer C. Once the fraudster starts on this path, it never stops!
How can the audit team or other employees detect lapping?
Lapping can be easily detected by understanding how cash receipts have been applied to accounts receivable. If cash received from a customer is being applied to a different customer account, then lapping may be in play (or it could be an error!).
How can lapping be prevented?
The best way to prevent lapping is to have proper segregation of duties in the cash or treasury department. This involves separating the role of receiving the cash and applying the cash in the accounting records to specific customer accounts. Lapping could still occur, but both employees would have to be in on it!
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