Exposing Lapping Schemes Faster: How Forensic Accountants Uncover Misapplied Payments

Not All Corporate Fraud is Embezzlement—Sometimes, It’s About Looking Good on Paper

When people think about corporate fraud, they often picture blatant embezzlement — an employee siphoning money into personal accounts or fabricating expenses. But not all fraud is about personal gain. Sometimes, financial manipulation is done to make a company appear more financially stable than it actually is. This can be especially tempting when a company is preparing for an acquisition, courting investors, or trying to secure favorable financing terms.

One common scheme used to mask financial instability is lapping, a type of accounts receivable fraud where payments from one customer are misapplied to another’s account to conceal cash flow problems. Lapping can go undetected for years, making a company’s financials look healthier than they truly are—until forensic accountants step in.

In this blog, we’ll break down how lapping schemes work, why they’re difficult to detect, and how forensic accountants can leverage automation and bank transaction matching to expose them more efficiently. Using a real-world case study, we’ll highlight how a forensic team uncovered $30 million in misapplied payments—in just days—using automated financial analysis.

What is a Lapping Scheme?

A lapping scheme is a form of accounts receivable fraud where an employee misappropriates payments from one customer and covers it up by applying payments from another customer’s account. It’s essentially a financial shell game, designed to delay detection of missing funds.

How a Lapping Scheme Works:

1. The Initial Theft – An employee steals or diverts a payment from Customer A instead of applying it to their account.
2. Covering the Shortfall – When Customer A notices their account isn’t credited, the fraudster takes a payment from Customer B and applies it to Customer A’s balance.
3. Continuing the Cycle – The fraudster then uses a payment from Customer C to cover Customer B’s missing funds, and so on. This cycle continues indefinitely, keeping accounts looking correct—on the surface.

Since lapping schemes require constant manipulation, they’re time-consuming to maintain and easy to conceal in large companies with high transaction volumes. But they’re also highly risky—if the scheme is disrupted (for example, by an acquisition audit or a forensic investigation), the fraud can unravel quickly.

Case Study: How a Forensic Team Exposed a $30 Million Lapping Scheme

The Challenge

A healthcare staffing agency was acquired by a larger firm, and shortly after the deal closed, executives began to suspect that their new subsidiary’s accounts receivable didn’t add up. Payments weren’t properly matching invoices, and leadership needed to determine how big the problem was—and fast. Given the volume of transactions spanning multiple years, a manual review would have taken months.

To investigate, the company brought in forensic accountants from J.S. Held, who needed a way to quickly recalculate accounts receivable balances and identify any fraudulent misapplications of payments.

The Solution: Using Automation to Uncover the Scheme

Instead of manually reviewing 25,000+ check images and bank transactions, the forensic team used Valid8’s Verified Financial Intelligence platform (VFI) to automate their process and accelerate their investigation.

• Check Matching: They uploaded five years’ worth of check images, allowing the system to automatically extract payor details—even from low-quality scans.
• Transaction Extraction: The system matched check deposits to bank transactions, flagging missing or incomplete records that required further investigation.
• Automated Quality Control: Patented algorithms helped identify patterns of misapplied payments, revealing a material lapping scheme involving $30 million in misallocated funds.

The Outcome: A Swift and Data-Driven Resolution

With automated financial analysis, the forensic team identified the fraud within days—versus months with a traditional approach. This allowed the company to make rapid, informed decisions, including whether to file an insurance claim for financial losses.

Key Lessons for Forensic Accountants

1. Lapping Schemes Are Hard to Detect Without Automation
   
   • Traditional audits may miss lapping schemes because payments still appear to be coming in—just not to the right accounts. Automated transaction matching can quickly identify inconsistencies in cash flow.
2. Bank Statement and Check Matching Reveal Hidden Irregularities
   
   • Fraudsters rely on manual processes and disorganization to keep their schemes hidden. AI-driven check-to-bank statement reconciliation exposes missing payments and mismatched transactions much faster than manual review.
3. Automation Reduces Investigation Time from Months to Days
   
   • Forensic accounting firms don’t have months to review transactions manually. Automated financial data extraction and reconciliation eliminate tedious manual data entry, allowing forensic teams to focus on analyzing findings rather than sorting data.

The Future of Forensic Accounting: Why Automation is Critical

Lapping schemes, like many forms of financial fraud, rely on complexity and obfuscation to remain undetected. With corporate acquisitions, disputes, and litigation often hinging on accurate financial data, forensic accountants need tools that allow them to trace money movements efficiently and with confidence.

This case study demonstrates how forensic investigators can leverage automation to uncover misapplied funds, streamline financial analysis, and deliver faster, more accurate insights—helping businesses resolve disputes, recoup losses, and strengthen financial controls against future fraud.

Want to learn more about how forensic accountants are using technology to transform financial investigations? Stay ahead of the curve by contacting us today to learn more about how Valid8’s Verified Financial Platform can help you.