What is Lapping?
Lapping is a fraudulent scheme in accounting where funds received from one source are used to cover up the misappropriation of funds received from another source. It involves manipulating financial records to conceal the theft of money and is commonly associated with accounts receivable or cash receipts. Understanding lapping is crucial for detecting and preventing fraudulent activities within an organization’s financial processes.
Understanding Lapping
Imagine you borrow money from a friend to pay back another friend you previously borrowed from. You keep borrowing from new friends to pay back old ones, hoping no one notices. That’s similar to lapping—you’re using funds from one source to cover up your misappropriation of funds from another source. Lapping involves a cycle of deception and manipulation of financial records to conceal fraudulent activities.
Key Aspects of Lapping
- Misappropriation of Funds: Lapping occurs when an employee or individual misappropriates funds received from one source for personal use or unauthorized purposes. Instead of depositing the funds into the appropriate account, the individual diverts the money for personal gain.
- Concealment: To conceal the misappropriation of funds, the individual manipulates financial records, such as accounts receivable or cash receipts, to create the appearance of legitimate transactions. This often involves falsifying accounting entries or altering customer account balances to hide the fraudulent activity.
- Cycle of Deception: Lapping typically involves a cycle of deception, where funds from one source are used to cover up the misappropriation of funds from another source. The individual may continue lapping funds over an extended period, creating a complex web of fraudulent transactions to evade detection.
Example of Lapping
Let’s consider a hypothetical example to illustrate how lapping works:
John works as an accounts receivable clerk for Company XYZ, a retail business. As part of his role, John is responsible for processing customer payments and recording them in the company’s accounting system. However, John is experiencing financial difficulties and decides to engage in lapping to cover his personal expenses.
When a customer, Sarah, makes a $500 payment to Company XYZ, John intercepts the payment and deposits it into his personal bank account instead of recording it in the company’s accounting records. To conceal the theft, John manipulates the accounting records to make it appear as though Sarah’s account has been credited with the payment.
To cover up his tracks, John continues lapping funds by diverting payments from other customers to cover the misappropriation of funds from Sarah’s payment. He creates a cycle of deception by using funds from new customers to cover up his theft from previous customers, making it difficult for the theft to be detected.
Over time, the fraudulent scheme escalates, and John’s actions result in discrepancies in the company’s accounts receivable records. Eventually, an internal audit uncovers irregularities in the accounting records, leading to the discovery of John’s lapping scheme and his subsequent termination from the company.
Conclusion
In conclusion, lapping is a fraudulent scheme in accounting where funds received from one source are used to cover up the misappropriation of funds received from another source. It involves manipulating financial records to conceal the theft of money and is commonly associated with accounts receivable or cash receipts. By understanding the concept of lapping and its key aspects, organizations can implement measures to detect and prevent fraudulent activities within their financial processes, safeguarding their assets and financial integrity.