What it is:
How it works (Example):
A lapping scheme begins when someone -- a clerk, for example -- steals money that was generated by a transaction (for example, a sale). This individual offsets the missing money using cash from the next transaction. The receivable from this second transaction is covered by money from the third transaction, etc.
To illustrate, suppose Gene, a cashier for store ABC, processes a sale for $50. He puts the cash in his pocket. Gene's next customer purchases $100 of merchandise. Rather than use this customer's payment toward the corresponding $100 receivable, he uses $50 to satisfy the $50 open receivable from the first customer and uses the remaining $50 to partially offset the open $100 receivable from the second customer. Gene continues allocating (lapping) money from successive sales to the preceding receivables so the store's accounting records fail to illuminate the discrepancy.
Why it Matters:
A lapping scheme can only be temporarily successful because the discrepancy eventually migrates into later cash/accounting records and is documented as a loss.