[1]Luckin Coffee, Press Release and Statements, Luckin Coffee announces smart unmanned retail strategy, bringing Luckin closer to customers 7 January 2020 < https://investor.luckincoffee.com/news-releases/news-release-details/luckin-coffee-announces-smart-unmanned-retail-strategy-bringing>. Luckin failed to disclose accurate revenue and expenses, and also obtained money through false bank statements. Seven Pillars Institutes Financial Ethics Training Video Series: Ethics in Finance is Good! According to U.S regulators, the unicorn startup coffee chain had internationally and materially overstated its revenues in 2019 and understated its net loss (Peng, 2020). The regulators in China and the US should have ensured that Luckin fulfilled its duty of integrity and transparency before listing. The SECs complaint alleges that, from at least April 2019 through January 2020, Luckin intentionally fabricated more than $300 million in retail sales by using related parties to create false sales transactions through three separate purchasing schemes. Luckins directors failed to ask any questions or spot the unethical practices. This resulted in Luckin agreeing to a settlement, including permanent injunctions and paying USD180 million in monetary penalties. Photographer: Steven John Miner for Bloomberg Businessweek. The financial department only had access to the fabricated database and was unable to verify the accuracy of the transactions. articles a month for anyone to read, even non-subscribers. Luckin is a beverage retailer in China selling mainly coffee and tea. Looking ahead, structural changes could reduce the risk of fraud. [8]Further, the report raised questions about the inflated revenue, false accounting practices, and abuse of senior management positions. Embattled Chinese chain Luckin Coffee is among a raft of 45 companies hit with a combined fine of nearly $9 million over a scandal involving false sales figures, China's market regulator said Tuesday. The seller and buyer negotiate the market price based on the information consistent with the actual value of the goods or services. Why wait three years?". Luckin vowed to overtake Starbucks as China's biggest coffee chain when it launched shares in the US last year. Seven Pillars Institute is of the view that Muddy Waterss combination of short selling and equity research is a clever business model, necessary to satisfy the markets need for research analysts or firms independent of sell-side companies.[5], Short-seller Muddy Waters Research received an anonymous report, together with supporting evidence in January 2020, alleging the fraudulent conduct of Luckin. companies. Luckin opened 5,000 locations in Beijing, Shanghai, and other cities across China and last year reported sales of as much as $200 million a quarter. Commutative justice relates to fairness in the exchange of goods or services. Researching of Ethical Business Issues; The Cambridge Analytica and Facebook Scandal . [31]US Securities and Exchange Commission, Luckin Coffee Agrees to Pay $180 Million Penalty to Settle Accounting Fraud Charges, 2020-319, 16 December 2020, Press Release < https://www.sec.gov/news/press-release/2020-319>. Investors expect management to behave honestly, which includes full and transparent disclosure of financial statements. These two companies have one other thing in common beyond their recent involvement in high profile accounting scandals - it turns out that both companies' auditor was Ernst & Young, as was the case with several other companies involved in recent . The Luckin Coffee fraud scandal was a "great morality tale" for markets, and more needs to be done to protect American investors from such cases, said an analyst, who said a bill to delist. Applying virtue ethics: the Rajat Gupta case, https://investor.luckincoffee.com/news-releases/news-release-details/luckin-coffee-announces-smart-unmanned-retail-strategy-bringing, https://www.sec.gov/news/press-release/2020-319>, https://sevenpillarsinstitute.org/profit-ethics-short-selling-case-muddy-waters/, https://www.qsrmagazine.com/fast-food/luckin-coffee-faces-fraud-allegations-anonymous-report, https://drive.google.com/file/d/1LKOYMpXVo1ssbWQx8j4G3-strg6mpQ7F/view, https://www.reuters.com/article/us-luckin-coffee-stock-citron-idUSKBN1ZY2EK, https://investor.luckincoffee.com/node/6391/html, https://www.globenewswire.com/news-release/2020/06/19/2050625/0/en/Luckin-Coffee-Received-Notification-from-Mr-Tianruo-Pu-of-his-Resignation-as-an-Independent-Director.html, https://www.forbes.com/sites/russellflannery/2020/04/03/responsibility-for-luckin-coffees-accounting-debacle-is-far-and-wide/?sh=a7be566104e4, http://www.chinabevnews.com/2020/07/ernst-young-says-it-isnt-responsible.html, https://www.nasdaq.com/market-activity/ipos/overview?dealId=1083391-89499, https://www.caixinglobal.com/2020-05-20/luckin-explained-how-did-scandal-plagued-coffee-highflyer-get-into-such-hot-water-101556560.html, https://www.wsj.com/articles/behind-the-fall-of-chinas-luckin-coffee-a-network-of-fake-buyers-and-a-fictitious-employee-11590682336, https://investor.luckincoffee.com/news-releases/news-release-details/luckin-announces-substantial-completion-internal-investigation, https://www.qsrmagazine.com/finance/luckin-coffee-agrees-pay-180-million-fine-fraud-scandal, https://www.sec.gov/news/press-release/2020-319, https://www.capitalwatch.com/article-5769-1.html, https://asia.nikkei.com/Opinion/What-the-Wirecard-and-Luckin-Coffee-scandals-can-teach-Asia-s-boards, https://crm.marcumbp.com/china-accounting-insights/who-is-responsible-for-preventing-frauds, https://sevenpillarsinstitute.org/glossary/conflict-of-interest/. However, despite Luckin's recent success it did not quite manage to win over the market and outrank Starbuck as china's most successful coffee franchise. [9]Muddy Waters said it decided the share price of Luckin would drop and had sold short Luckins shares after releasing the report to the public.[10]. Rescuers search wreckage of deadly Greece train crash. Second, providing more fraud detection training for auditors would increase their skills and ability to spot improper transactions. Bork says it's too early to. It was found by the US SEC that Luckins misconduct constituted fraud. Alexandra, and Wong, Edward. [36]Drew Bernstein, Who is responsible for preventing frauds? In Forensic Accounting, MBP, . The scandal could have a profound and far-reaching impact and offers lessons for the business world and beyond. Similar to the first scheme, these fake coupon redemption orders artificially enhanced sales performance. Public issuers who access our markets, regardless of where they are located, must not provide false or misleading information to investors, said Stephanie Avakian, Director of the SECs Division of Enforcement. Yu, and Ma, Diandian. [23]Some of Luckins employees or their related companies established and controlled these shell companies, which transferred funds to Luckin. STAY CONNECTED China corporate governance in doubt after two accounting scandals in week. You can still enjoy your subscription until the end of your current billing period. For a full comparison of Standard and Premium Digital, click here. Standard Digital includes access to a wealth of global news, analysis and expert opinion. While there are challenges in our ability to effectively hold foreign issuers and their officers and directors accountable to the same extent as U.S. issuers and persons, we will continue to use all our available resources to protect investors when foreign issuers violate the federal securities laws., The SEC's complaint alleges that Luckins disclosures to investors about its revenues were false, said Carolyn M. Welshhans, Associate Director of the SECs Division of Enforcement. China's second accounting scandal in less than a week is underscoring concern over . Established in October 2017, this . In Luckins case, the share price increased because of overstated revenue and expenses. One of China's most powerful regulators has raided the offices of Luckin Coffee after opening an investigation into the scandal-hit firm. [21]Case Securities and Exchange Commission vs Luckin Coffee, Inc., 1:20-cv-10631, United States District Court Southern District of New York, 16 December 2020. By Jonathan Maze on Feb. 08, 2021. [18]Nasdaq, Luckin Coffee Inc. (LK) , [19]Yang Ge, Shen Xinyue, Wei yiyang and Qu Yunxu, Luckin Explained: How Did Scandal-Plagued Coffee Highflyer Get Into Such Hot Water? 20 May 2020, Caixin < https://www.caixinglobal.com/2020-05-20/luckin-explained-how-did-scandal-plagued-coffee-highflyer-get-into-such-hot-water-101556560.html>. Although EY did not audit Luckins 2019 financial statement, EY is not necessarily absolved of responsibility. EY wrote a private letter to a number of investment banks stating it did not have an issue with the financial performance of Luckin in the first three quarters of 2019. ET Luckin Coffee to pay $180M for accounting fraud. When breaking down There is evidence showing the chairman instructed his employee to fabricate transactions. [14]However, another database comprising the fabricated transactions was used to prepare the false financial statements. All Rights Reserved. CEO investors. This is not yet being reported by a single news outlet. Therese. Lu, [8]Anonymous Report, Luckin Coffee: Fraud + Fundamentally Broken Business, 2020 . Luckin returned funds to the funding companies in the third scheme through bank transfers and fabricated expenditure. Luckin Coffee ( LK) - Get Free Report was too good to be true. The Securities and Exchange Commission today charged China-based company Luckin Coffee Inc. with defrauding investors by materially misstating the companys revenue, expenses, and net operating loss in an effort to falsely appear to achieve rapid growth and increased profitability and to meet the companys earnings estimates. Chinese coffee chain Luckin Coffee was listed in the U.S. last year. These shell companies would then resell the coupons to individual customers. Codes of Ethics for Financial Institutions. Luckin Coffee, the Chinese startup that became mired in a fraud scandal and was kicked off Wall Street two years ago, is making a comeback. In 2019, the total fabricated expenses and costs were around USD196 million. Luckin highlighted its rapid growth in the first quarter of 2019, pointing to quantity of products sold, cumulative consumers, number of stores, and revenue. Individualism, Utilitarianism, Kantian Theory, and Virtue Theory in particular can all show how Luckin's actions were unnaceptable, and lead to the conclusion of what they should have done , Nikkei montage/Source photo by Yuki Kohara, The Luckin scandal: fake sales, power struggles and a 'broken model', HENNY SENDER, Nikkei Asian Review columnist, Luckin first casualty as US takes aim at China transparency, Death of the coffee king: power and money in corporate India, In Depth: Investors sip bitter taste of Luckin Coffee scandal, Trump threatens to cut 'whole relationship' with China, China Inc. rethinks US listings as scrutiny tightens, Trump adopts wrong response to China's tech threat, China's STAR Market to ease merger rules for tech companies, SoftBank and Son search for path out of 'Coronavirus Valley', How Trump's China obsession undermined the coronavirus effort, Son Heung-min: The rise of Asia's biggest football star, 'Fear for our families': A year of Putin's war through the eyes of Ukrainians, Kazuo Ueda: Next BOJ chief inherits world's toughest central bank job. Nikkei Asian Review, now known as Nikkei Asia, will be the voice of the Asian Century. It is likely these individual customers were also employees as they neither placed real orders nor redeemed the coupons. Cookie Policy Earnings in the second quarter of 2019:Luckin substantially overstated its revenue by 27%, expenses by 9%, and net loss was understated by 15%. Finance from July 2019 to July 2020. After Luckins misconduct was discovered in the course of the annual external audit of the companys financial statements, Luckin reported the matter to and cooperated with SEC staff, initiated an internal investigation, terminated certain personnel, and added internal accounting controls. Overseas stock markets - and those in Hong Kong - can often turn a blind eye to . 2020-12-17T19:44:00Z. [10]Saqib Iqbal Ahmed, Luckin Coffee share price may nearly double to $60 on US exchanges: hedge fund Citron Capital, Reuters, 5 February 2020 < https://www.reuters.com/article/us-luckin-coffee-stock-citron-idUSKBN1ZY2EK>, [11]33,000,000 Amercian Depositary Shares, Luckin Coffee Inc. Representing 264,000,000 Class A Ordinary Shares . could be exchanged for cups of coffee through fake buyers and obscure The SEC has the authority to bring a civil action against an individual or company and impose civil penalties. Luckin Coffee is a Chinese premium . Defrauding Investors. CNN, Cable News Network, 26 June 2020, www.cnn.com/2020/06/26/investing/luckin-coffee-delisted/index.html. Bloomberg Daybreak, anchored from New York, Boston, Washington DC and San Francisco provides listeners with everything they need to know. The scandal could have a profound and far-reaching impact and offers lessons for the business world and beyond. There are monitoring, investigation, and moral obligations between regulators and publicly listed companies. But this company, in my opinion, has a future regardless of past fraudulent issues. Charles Zhengyao Lu, chairman and founder of Luckin Coffee, and Jenny Qian Zhiya, chief executive officer of Luckin Coffee, ringing the opening bell during the company's initial public offering (IPO) at the Nasdaq in New York, on May 17, 2019. DeSantis won't say he's running. In May 2019, within 18 months of Luckins grand opening, the company launched its IPO of American Depositary Shares in the United States and listed on Nasdaq. However, the purpose of due diligence is to express the auditors opinion of reasonable assurance. (2020). Established in October 2017, this high-profile coffee maker advertised itself as the Chinese challenger of Starbucks and soon attracted generous venture capital investment (Yang and Lv, 2019). it disclosed this April that its chief operating officer fabricated the company's 2019 sales, were delisted from the Nasdaqlast Monday. BUS4301 Strategic Management 2020-21, Term 2 Ethics case descriptions 1 Luckin Coffee Scandal Luckin Coffee had a goal to sell lots of coffee in China, a nation of resolute and happy tea drinkers, and the competitor it promised to defeat was Starbucks Corp. Luckin Coffee co-founder apologizes for accounting scandal and promises fight to save the company Luckin, founded in 2017, went public last year and surged due to what - at the time - appeared . offers FT membership to read for free. According to the complaint, certain Luckin employees attempted to conceal the fraud by inflating the companys expenses by more than $190 million, creating a fake operations database, and altering accounting and bank records to reflect the false sales. [29]Furthermore, evidence showed the companies which purchased the coupons had links to the chairman (see Figure 3). If they do not comply, they would be banned from trading on the exchanges. She was referring to China Hustle, a film that was made about Chinese fraud cases that unsuspecting American investors bought into. Luckin Coffee has emerged from federal bankruptcy protection nearly two years after the Chinese chain was found to have fabricated more than $300 million in sales. Jenny Zhiya Qian, former COO Jian Liu, co-founder and chairman Charles Zhengyao, The company's CEO had to resign in light of the accounting fraud, which involved fabricating the transactions in 2019, the same year it . The senior management of Luckin has a fiduciary duty to certify and ensure financial statements are accurate. Poletti, 2020, www.courthousenews.com/luckin-coffee-associated-firms-fined-9m-over-scandal/, Hope, Blaise. Several parties are responsible for the accounting scandal and fraud at Luckin. China's embattled coffee delivery startup Luckin has reached a settlement with the U.S. Securities and Exchange Commission, agreeing to pay a $180 million penalty to . The firm's shares slumped this month after it revealed that it had uncovered $310m (250m) in fake transactions. The fund had invested in China Auto Rental, an online car hire business founded by Lu Zhengyao, Luckin's chairman. Luckin was listed on the Nasdaq Stock Market in 2019, bringing additional capital to fuel its ambitious growth. We use Instead, EY issued a letter to the investment banks, stating that Luckin had no financial irregularities. In Luckins case, several moral agents failed to fulfil their moral responsibilities, which led to the accounting scandal and fraud. The company had fabricated much of its sales in 2019, thus attracting investigation by the U.S Securities and Commission and Chinas securities regulator. Luckin also conducted an internal investigation and in April 2020 announced that more than USD300 million was fabricated in 2019, and the relevant public financial reports should be ignored. Shares fell as much as 27% in a single day. This could be a result of prioritizing short-term profits and overlooking behavioural pitfalls. Analyst. CNBC, CNBC, 7 July 2020, www.cnbc.com/2020/07/06/investing-fraud-at-china-luckin-coffee-fraud-case-warning-for-investors.html. Internal auditors are responsible for overseeing accounting accuracy and compliance procedures. Securities and Exchange Commission (SEC) SEC is a federal government regulatory agency that oversees securities markets to ensure accountability, transparency, and fair financial transactions. La The case deals with a RMB 2.2bn accounting fraud at Luckin Coffee Inc. The coffee chain unicorn not even two years old at the time went public in New York . Across America, smaller cities and less-populated states are offering cash and perks to lure remote workers away from big metropolitan areas. How a Chinese tech darling went from startup wonder to market pariah. There's every incentive to do it," she said. and other data for a number of reasons, such as keeping FT Sites reliable and secure, [35]This letter was issued before the 2019 financial statements were audited. Luckin Coffee is a fraud! 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