What it means
Lapping happens when someone who handles incoming cash and records payments decides to steal funds. Imagine Customer A pays an invoice, but the employee pockets the cash instead of banking it.
Because Customer A's account still looks unpaid, the employee panics about getting caught. When Customer B pays an invoice a few days later, the employee applies Customer B's money to Customer A's account to clear it.
Now Customer B's account is short, so the employee uses money from Customer C, and so on. This creates a rolling shell game of accounting tricks.
This practice matters because it represents a serious breakdown in internal controls and shows that one person has too much control over money. Usually, lapping occurs when the person receiving cheques or cash also updates the ledger.
Without proper oversight, the scheme can run for months or years, growing larger each time. In practice, businesses prevent lapping by enforcing segregation of duties.
The person who opens the mail and handles customer payments should never be the same person who updates the accounting records or reconciles bank statements. Requiring direct electronic payments straight into a company bank account also makes cash interception much harder.
Auditors watch out for lapping by checking whether customer payments match the exact dates on bank deposits. Sudden delays in posting payments or unusual shifts of money between accounts act as warning signs.
Spot checks and mandatory staff holidays also help uncover this type of employee theft. Think of it as robbing Peter to pay Paul.
The thief must keep the juggling going forever, because the moment new payments stop arriving, the gap becomes visible and the debt never goes away; it only moves along the line.
In practice
Real-world examples
Example 1
At a boutique design agency, the office manager steals a $500 cheque from Client X. When Client Y pays their invoice next week, the manager applies that money to Client X to hide the theft, leaving Client Y's account unpaid. Client Y receives a reminder about an invoice they have already paid, and the confusion starts the investigation.
Example 2
A regional wholesale distributor suffers losses when a billing clerk intercepts a cash payment from a retail shop. The clerk uses subsequent payments from two other shops to slowly patch the gap over three months before an audit catches the mismatch. The auditor spots that the posting dates never agree to the bank statements.
Example 3
A property management firm faces a lapping scheme where an administrative worker pockets a tenant rent payment. The worker uses the next tenant's rent to cover the first, cycling through tenant accounts until a bank reconciliation exposes the delay. The firm then moves all rent collection to direct bank transfers.
Think of it
Imagine borrowing a book from Alice to give to Bob, then when Charlie wants a different book, you steal Alice's book back to give to Charlie. You are constantly robbing Peter to pay Paul just to keep everyone quiet.
Formula
Calculation
There is no formal formula, but the hidden shortage can be tracked: Hidden Shortage = Cash Stolen and Never Banked. Reshuffling payments between accounts moves the shortage from one customer to another but never reduces it.
Example: the clerk keeps a $1,000 payment from Client A. A few days later Client B pays $1,000, which the clerk applies to Client A's account, so the shortage now sits on Client B. Then Client C pays $1,500; the clerk applies $1,000 to Client B's account and keeps the other $500 for personal use. The total cash stolen is now $1,000 + $500 = $1,500, and it sits as a hidden shortage on Client C's account, so receivables are overstated by $1,500.Case study
Seen in the real world
This is a fictional, illustrative scenario. GreenLeaf Landscaping, a medium-sized grounds maintenance firm, employed a long-standing accounts receivable clerk named Sarah. Trusted by the owners, Sarah handled both incoming client cheques and ledger updates. Over eighteen months, Sarah stole cash and cheques totalling $12,000 from various commercial clients. To keep clients from complaining about unpaid invoices, she used incoming payments from newer clients to clear older balances.
The scheme unravelled during a routine annual audit when the auditor noticed that bank deposit dates frequently lagged behind the dates payments were posted to client accounts. Several clients contacted by the auditor also confirmed they had paid weeks earlier. GreenLeaf faced a $12,000 financial loss and had to overhaul its accounting controls. It introduced strict segregation of duties so that cash handlers no longer touched the general ledger, moved clients to bank transfers, and asked a manager outside the accounts team to reconcile the bank account every month.
Watch out
Common mistakes
- Allowing the same person to receive cash and update customer accounts.
- Failing to conduct unannounced audits or spot checks on accounts receivable.
- Ignoring customer complaints about delayed payment acknowledgements.
Questions
People also ask
How is lapping different from embezzlement?
Embezzlement is the general act of stealing funds entrusted to your care. Lapping is a specific method used to hide that theft by juggling incoming customer payments.
Can lapping happen with electronic bank transfers?
It is much harder because electronic payments go directly into the company bank account, bypassing employees who might otherwise intercept physical cheques or cash.
What is the best way to detect lapping?
Bank reconciliations, checking deposit slips against customer receipt dates, and forcing staff who handle money to take mandatory holidays.