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Lapping Scheme


A lapping scheme is a fraudulent accounting practice involving the theft or misappropriation of funds or assets by covering up the discrepancy with subsequent funds received. Perpetrators manipulate account records and cash flow to create the illusion that finances are balanced. The scheme usually continues until the discrepancy becomes too large to conceal or an audit exposes the fraud.


The phonetics of the keyword “Lapping Scheme” can be represented as: /ˈlæpɪŋ ski:m/

Key Takeaways

  1. Lapping Scheme is a type of fraud that involves covering up a shortfall in funds from one account by temporarily using funds from another account.
  2. It may initially be difficult to detect as the funds are constantly being shuffled among different accounts and may appear to be balanced.
  3. Effective internal controls, account reconciliations, and regular audits are essential in preventing and detecting lapping schemes.


The business/finance term “Lapping Scheme” is important because it is a deceitful practice involving the manipulation of accounts receivable to cover up the misappropriation of cash. In a lapping scheme, an employee applies payment from one customer account to another to conceal discrepancies in account balances resulting from cash theft. This fraudulent activity often snowballs as the perpetrator must continue manipulating funds to maintain the illusion of proper accounting, eventually placing the company at considerable financial risk. Awareness and understanding of lapping schemes are crucial for businesses to implement effective internal controls and auditing measures, ensuring their financial integrity and safeguarding against potential financial losses caused by dishonest employees.


Lapping schemes primarily serve as fraudulent techniques employed by employees in positions of financial control or access to cash. The main purpose of a lapping scheme is to cover up the misappropriation of funds by manipulating accounts receivable records, usually without the knowledge of supervisors or owners of the business. This deceitful activity allows an employee to steal funds from a company while giving the appearance that all financial transactions are accurate and in good standing. In practice, lapping schemes are carried out by diverting a payment from one customer and using it to cover a previous embezzlement.

Essentially, the employee would apply a subsequent payment from another client to pay off the first client’s balance, creating a continual cycle of theft and concealment. Over time, this process is repeated with multiple customers’ payments, making it difficult to detect discrepancies solely based on the accounts receivable records. It is important to note that lapping schemes are not a sustainable or foolproof means of theft, and they tend to unravel when the employee is unable to continue the cycle or when the scheme is detected through internal audits and controls.


A lapping scheme is a type of financial fraud where an employee manipulates accounts receivables to cover up the theft of funds. Here are three real-world examples:

1. Betty’s Bake Shop: Betty, the accountant at a popular bake shop, notices that not all cash payments from customers are being monitored closely. She decides to steal some of this cash and covers her tracks by applying the next customer’s payment to the previous customer’s account. As this cycle continues, she manipulates the accounts receivable records to hide the thefts. Her lapping scheme eventually becomes an issue when discrepancies appear in the financial statements.

2. Tech Widgets Corporation: John, a billing specialist at a technological gadgets company, comes across an opportunity to embezzle money by diverting incoming customer payments to his personal bank account. To maintain the illusion that all accounts are up-to-date and hide his activities, he applies a later payment from another customer to cover the previous misappropriation. He continues this lapping scheme for a while, relying on the constant flow of new payments to cover his tracks, until finally being discovered during an internal audit.

3. Insurance Provider ABC: Sarah, a supervisor at a small insurance company, discovers that she has the ability to manipulate customer premium payments. She decides to take advantage of the company by applying payments received from clients to earlier client accounts. This lapping scheme allows her to divert funds for her personal use, while the accounts receivable records look accurate and up-to-date. However, Sarah’s scheme is eventually exposed when a client complains about a missing payment, leading to an investigation and her termination.

Frequently Asked Questions(FAQ)

What is a Lapping Scheme?

A lapping scheme is a type of financial fraud where an employee manipulates accounts receivable records to cover up the theft of cash. The employee steals cash from one customer’s payment and covers it up by using cash from a subsequent customer’s payment.

How does a lapping scheme work?

When a payment is received from a customer, the employee steals the cash and delays the recording of the payment in the company’s books. To cover the theft, the employee then applies the payment from the next customer to the previous one. This process continues, with each successive payment being used to cover the previous theft.

What are some warning signs of a lapping scheme?

Some common warning signs include frequent delays in posting customer payments, irregularities in accounts receivable records, a consistently high accounts receivable balance compared to sales, a disproportionate amount of customer complaints regarding account balances, and frequent adjustments in customer statements.

How can a lapping scheme be detected?

Regular internal audits, surprise cash counts, monitoring the accounts receivable aging report, and implementing a segregation of duties can help detect lapping schemes. Moreover, rotating employees’ responsibilities and encouraging anonymous reporting of suspicious activities are other preventive measures.

How can a company prevent a lapping scheme?

Companies can prevent lapping schemes by implementing robust internal controls, including segregation of duties (e.g., separate employees should handle cash receipt and accounts receivable), conducting regular audits, reconciling bank accounts and customer accounts, and providing employee training on fraud prevention.

What are the consequences of a lapping scheme for the company and the employee?

For the company, a lapping scheme can lead to financial losses, damaged reputation, and loss of trust from customers and investors. For the employee involved, the consequences can include termination of employment, legal charges, and potential imprisonment.

Are lapping schemes easy to maintain?

Lapping schemes can be difficult to maintain over time since they require constant manipulation of accounts to cover up the fraudulent activities. As the imbalance in accounts receivable grows, the risk of detection increases, making the scheme unsustainable in the long run.

Related Finance Terms

  • Internal Fraud
  • Accounts Receivable Manipulation
  • Employee Embezzlement
  • Financial Statement Fraud
  • Collusion Detection

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