According to the Association of Certified Fraud Examiners, asset misappropriation schemes account for over 50% of all occupational fraud schemes. This category encompasses various activities, ranging from cash skimming to inventory theft and even the creation of fictitious employees. The accounts receivable department is particularly vulnerable to asset misappropriation, as dishonest employees may redirect customer payments for personal gain. If your business lacks strong internal controls for receivables, now is the time to take action.

The Most Common Accounts Receivable Fraud: Lapping Leads 

The most common form of receivables fraud is lapping, where perpetrators apply receipts from one account to cover misappropriations from another. For example, rather than credit Customer A’s account for its payment, a thief may pocket the funds and later post a payment from Customer B to A’s account, Customer C’s payment to B’s account, and so on.

Unethical write-offs and discounts also are popular. Instead of crediting a payment to a customer’s account, fraudsters might pocket the funds and then record a bad debt write-off or discount to the customer. Even though incoming payments are diverted, the customer’s account would reflect the expected current balance.

Investigation & Prevention

If receivables fraud is suspected, a forensic expert usually can trace a sample of cash receipts to the sales ledger and deposit slips to find discrepancies in dates, payee names, and amounts. An expert also may compare deposit slips against the books and send requests for confirmations to a sample of customers to verify current balances and payment histories. Bad debt write-offs, accounts with unexplained credits, increased customer credit limits, and random adjustments to the accounts receivable ledger also could come under scrutiny during a fraud investigation.

But to help prevent receivables fraud from occurring in the first place, businesses should segregate duties. This means that an employee who handles incoming payments from customers should be different from the person who handles invoicing. Also consider assigning a different employee to manage customer complaints because complaints tend to increase if someone is misappropriating receivables. Other helpful controls include mandating vacation time and job rotation for all accounting staffers.

Consider Audits

You also may want to consider conducting regular (and surprise) audits of receivables. Not only might audits help catch schemes in progress, but they enable you to test your controls and ensure employees are following them to the letter. Contact us for help.