Collections—are you being lapped?
Joan M. Renner, CPA, CGMA, Director 501(c)(fit!)
Fraud prevention tips often focus on how to control outgoing payments. But why would anyone take the risk of creating fraudulent disbursements if he or she could just lift some incoming money before anyone else know it was there?
That’s what happened in South Whitehall Township, Pennsylvania.
In April 2015 the township’s former utility supervisor, Nancy Tonkin, pleaded guilty to stealing more than $845,000 using a long-running lapping scheme. She worked for the township for 32 years and had complete control over collecting utility payments. She admitted to pocketing resident payments for water, sewer, trash and recycling fees, and using collections from other residents to cover it up. Tonkin used the stolen funds for trips to nearby casinos where she and her husband gambled.
The township first noticed discrepancies upon restructuring its finance department after Tonkin’s supervisor retired. During an investigation, when auditors asked Tonkin about a missing payment, she came up with the money, saying she had locked it in her desk. She was fired, arrested and sentenced to two to seven years in prison.
Think this won’t happen in your nonprofit? It’s more common than you think. Skimming incoming funds is the fifth most frequent fraud taking place in nonprofits today*–and those are the ones who get caught. Even nonprofits that invoice members, sponsors or donors, and apply collections to open invoices, are vulnerable, if one person has too much control over the process.
What can we learn?
What’s lapping? The perpetrator steals an incoming check from member ABC, leaving that billed invoice open. Then the perpetrator applies a subsequent collection from member XYZ to close out the first receivable, leaving the second one open.
Eventually, you notice cash shortages, you try to collect some receivables, members and sponsors start complaining about billing errors, and then some collections appear just in time. Lapping is a losing game for the perpetrator, but if management allows confusion over billings and collections to continue, it can go on for a long time.
What are some warning signs that may indicate lapping?
- Cash shortages,
- Slow collections,
- Uncollected receivables,
- Receivables on the books for people who already paid,
- Complaints about billing errors,
- Receivables that get collected just in time,
- Receivables written off,
- Frequent mistakes in posting payments to the wrong account,
- A significant and long-running difference between the accounts receivable list total and the general ledger balance,
- Discovering member or sponsor checks hanging around in a desk drawer,
- Incoming checks deposited much later than they were written,
- Member payments posted much later than they were paid.
What can a nonprofit leader do to prevent lapping?
Control your incoming payments.
- Try not to receive payments at your office. Address your reply envelopes to a bank lock box.
- Request that checks be payable to your organization’s full name rather than your initials.
- Even better, encourage members and sponsors to pay online. Of course there are service fees involved, but they don’t come close to the average loss from a skimming fraud.
- Restrict the ability to write off accounts or review all write offs.
- Match the receivables list to the general ledger account total every month.
- Monitor collections and direct any discrepancies to someone other than the bookkeeper.
- Intercept the incoming mail and run incoming checks through a desktop deposit scanner before checks go to the bookkeeper for posting to members’ accounts.
- Match or reconcile total bank deposits to total posting of receivables collections
Learn more about skimming of incoming contributions in our February 2017 FIT! TIP, Spare Change.
Learn more about overseeing nonprofit finance in our emerging leaders’ seminar, Financial Leadership Training for Emerging Nonprofit Professionals.
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*yes, it’s true, per the Association of Certified Fraud Examiners Report to the Nations on Occupational Fraud and Abuse 2016 Global Fraud Study.
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