Accounts Receivable Fraud

Posted on Wednesday, November 08, 2017

The sale has been made, the customer has paid, yet the company receives no revenue. How can this happen?

How Fraud is Often Reported

Most fraud cases are uncovered by a tip or complaint from an employee or other source, according to a 2014 study done by the Association of Certified Fraud Examiners. More than 40 percent of all cases were detected by a tip.

Of the cases in which a tip was instrumental in the fraud detection and the organization had a hotline, 51 percent were received via the hotline. And most tips came from employees of the organization (49 percent) followed by customers (21.6 percent) and vendors (9.6 percent). Another 14.6 percent of tips were received anonymously and 1.5 percent were reported by a competitor. The rest came from shareholders and perpetrators' acquaintances.

Here is some advice from the Association of Certified Fraud Examiners on getting staff members to come forward with tips:

Train employees to understand what constitutes fraud and how it hurts the organization.
Encourage employees to report illegal or suspicious behavior.
Reassure staff members that reports can be made confidentially and that the organization prohibits retaliation against whistleblowers.

Accounts receivable fraud, commonly referred to as "lapping," occurs when an employee is entrusted with processing customer payments but then steals the money for his or her personal needs. Once a lapping scheme begins, subsequent checks are used to cover the missing checks. The employee generally must continually monitor accounts so he or she can steal from one customer to pay others.

Depending on the volume of checks received, a lapping scheme can be initiated and maintained over a number of months or even years. The losses can be significant. Not only will the company be a victim of fraud, your customers can also become involved. In order to reconstruct the fraud and ensure that all payments are appropriately recorded, the company might be forced to enlist the help of their customers by requesting canceled checks or other documents.

Below is a list of questions about accounts receivable. If you answer "yes" to one or more of them, it should send up red flag that fraud could be occurring at your company:

Is only one employee responsible for processing accounts receivable payments? Is the person protective of his or her work area and won't take regular vacations or only takes a day or two off at a time?
Do customers consistently complain that payments have been misapplied, posted late, or not posted at all?
When customers' payments are reconciled against the general ledger and sub ledgers, are there unexplained differences?
Do sales appear to be increasing but the dollar amount of receivables is remaining flat or declining?
Are written-off amounts associated with accounts receivable balances increasing? And yet, there has been no discernible change in the economy, or customer payment habits.
Is accounts receivable turnover declining over an extended period? Here is the calculation to find this number: Accounts Receivable Turnover Ratio = annual credit sales / average accounts receivable.

Seven Steps to Help Prevent Lapping

1. Assign more than one employee to process accounts receivable payments and post them to the accounts receivable sub ledger.

2. Rotate employees frequently.

3. Mandate vacation time.

4. Audit the accounts receivable collection process at least every six months. Your accountant can provide expert guidance in this area.

5. Conduct a regular review of write-offs, credits and adjustments to the accounts receivable sub ledger.

6. Reconcile the sub ledger and general ledgers frequently.

7. Review the accounts receivable aging analysis to ensure that all accounts are aging appropriately.

Example: Consider the fraud involving a bank employee responsible for processing customer mortgage payments. Over the course of a two year period, the employee who was responsible for receiving and posting customer payments converted more than $195,000 for her own use. The volume of customer payments was significant, so the employee had the ability to cover the missing payments with newer ones. The crime only unraveled when the employee was forced to take medical leave and the fraud was discovered by her replacement. Many of the red flags listed above were present; however, the bank neglected to audit the accounts receivable collections and posting processes for more than four years. Bank managers explicitly trusted the employee because she worked there for more than thirty years.

Accounts receivable fraud is not difficult for employees to perpetrate, but it can be exceptionally difficult to uncover. Given the nature of the fraud, the volume of documentation that must be reviewed can be considerable. Even worse, the impact on customers can be significant. Your accountant can ensure that the appropriate controls and oversight are in place to minimize the risk of fraud involving your company's accounts receivable.

Posted in Fraud & Forensics Group

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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