Many occupational frauds revolve around an employee simply stealing money from their employer. They may do this at any point in the business system where money (in the form of cash or cheques) is physically available. The type of access that the employee has to the business system will determine what type of fraud they can commit.
The employee has two options when stealing money – stealing the money before it is recorded, or stealing it after it has been recorded.
1. Stealing money before it (being the sale and the expectation of the receipt of the money) is recorded usually involves the theft of money from ‘sales’. No one is expecting the money as the sale is not recorded, so it will not be missed. The employee may then only have to justify the reduction of stock, but depending of the type of business and the business system in place, this may not be difficult or really even required.
2. Stealing money after it has been recorded usually occurs when accounts receivable money is stolen or ‘skimmed’. Actually this is half-correct. The sale and the debtor (the expectation of the receipt) have been recorded, but the money is stolen before the actual receipt of money has been recorded against that expectation. Because the amount has been recorded in the debtor’s ledger and is expected to be received, the employee has to hide the loss of the money. This is commonly done through lapping.
Lapping is not a fraud itself. It is a way of hiding a skimming fraud with another skimming fraud. One fraud “laps” over another. If undiscovered, lapping may continue indefinitely as each new fraud hides and ‘fixes’ the older frauds. The employee steals a receipt before it is recorded as received. It usually has to be stolen before it is recorded as received as the banking records will not match the entries in the debtor’s ledger if stolen after it is recorded. [This assumes that the employee does not have control over the banking records. If they do, this step will probably not be required either.]
But some entry must be made in that debtor’s account for the stolen receipt before the next statement is issued, or the debtor will question the balance, wonder where their payment went and someone will look into the matter. The receipt must be recorded somehow, but in a way that receipts in the ledger match the banking records. If a false entry cannot be made in that debtor’s account, the statement may be adjusted or a completely false statement may be created before it is sent to the debtor. But these are not permanent fixes to the problem. An entry needs to be made in the debtor’s records showing the receipt.
Lapping hides the theft from the original debtor with monies from another debtor. An amount received from debtor B just before the statements are to be issued is banked and recorded as if it had been received from debtor A for the required amount. That solves the problem with debtor A, but creates a problem with debtor B. But there is time to fix that problem as debtor B would not expect a payment so close to the statement date to be on the current statement, they would accept that it will appear on the next one. At that later time, money is stolen from debtor C and is used to solve the problem with debtor B, and so on. New money is used to hide old problems.
As the first fraud is resolved by the second fraud (debtor A’s account looks fine), the current fraud is usually fairly new and there is always potential to cover that with another lap. The employee will then look for some other way to account for the missing money in the records. Although lapping may be fairly easy, it requires constant attention. Most frauds hidden by lapping are discovered when the employee is away from the office for some time and someone else looks at the ledger – meaning that rotation of duties is one way to control and detect these frauds.
Employees will look for some opportunity to allocate the missing funds in a way that they appear to have been received, or will not be expected to ever be received. The problem is that the debt is constantly moving from one debtor to the next as it is lapped, and any entry in the account of a current debtor will be seen by that debtor, and that may raise questions.
The employee may look for a liquidated or bankrupted customer. If that insolvent debtor has made a payment in the recent past, the required amount from that payment can be allocated to the debtor that is currently being used to lap the fraud. The outstanding amount due from the insolvent debtor is increased by the amount, but it is eventually written off as uncollectable. The write off is easily explained, and the debtor (the liquidator or trustee) is generally not going to spent much time reviewing an account that will never receive a dividend. If it is questioned, the proof of debt is simply adjusted to the correct amount.
Business owners should be aware that the bankruptcy or liquidation of a customer is an opportunity for a dishonest employee to hide their sins, and they should examine the amounts that are to be written off and the history of that customer.