Business Case Project
The shares of the coffee chain slumped last month after it revealed the discovery of $310 m ( £250 m) in fake transactions. Luckin Coffee shocked Wall Street when he said that investors could no longer rely on previous financial statements that appeared to show rapid growth. As late as February of this year, the company had strongly denied what it called “misleading and false allegations” about its finances. The accounting scandal at Luckin is seen as clouding the prospects of other Chinese companies considering selling shares in the US. Luckin’s Nasdaq listing was one of China’s few successful US stock market debuts in 2019. The shares of the company were suspended from trading on 7 April. The Nasdaq exchange claimed that the shares would remain suspended until Luckin had fully satisfied its request for an addition.
Feasibility Report: The Case of Luckin Coffee
Introduction and Background Information
Luckin is a Beverage retailer company in China, selling coffee and tea. The chain's expansion culminated in the opening of hundreds of stores in different parts of the country. This expansion, however, was cut short by a scandal that impacted the brand massively. The US Securities and Exchange Commission charged the company with falsified financial statements that amounted to a fraud case. Later, the company got suspended from the stock market. Following the incidences, the company fired several executives and was required to pay a colossal fine by the SEC.
Luckin’s main problem was an ethical failure caused by the management's intentional misrepresentation of the company's financial status to mislead investors for self-interests. Ethics is a broad topic in modern business and can impact all levels, from senior managers to subordinates. In Luckin's case, it cut through various staff levels, including the senior management, the board of directors, the audit committee, internal auditors, and external auditors. Several factors could point out the unethical practices in the company.
There was a lack of integrity and commutative justice by the senior management. There isn't much evidence required to establish that the senior management lacked the incentive to maintain required ethics and fiduciary duties with stakeholders. It is often the case when a company produces falsified and misleading financial statements. Integrity is the key to building trust between investors and senior management. Investors expect a company to uphold honesty values through complete transparency. It was not the case with Luckin's senior management. It is plain that the company's senior management either participated in producing the false documents or encouraged the deception to happen. The executives deceived investors and violated commutative justice. Another evidence is the failure of the board of directors at the company to spot unethical practices leading to the scandal. The directors kept quiet and raised no red flags as they should have. Directors have to identify red flags in financial statements earlier and mitigate any risk of fraud. Internal auditors were also negligible because they could have identified the fabricated data that potentially violated their code of ethics.
Alternatives and Possible Outcomes
The first alternative is to invest in more fraud detection and reporting training for auditors and employees. In one way or another, auditors play a crucial role in verifying financial records. If this group of staff does not have the required experience and training in detecting red flags, the company could still experience a similar event in the future. The benefits of this alternative include increased ability and skills to spot improper transactions. It is an effective method to communicate the company's commitment to handling fraud. It could also help control audit costs and reduce the time that external auditors need to assess fraud. Finally, this could help create a system to report fraud cases in time. The challenges of this alternative include expenses incurred to finance the training. It could overwhelm the auditors and cause anxiety in the staff, impacting productivity.
The second alternative is to fire all employees proven to have participated in the fraud. The benefits of this alternative include the development of a culture that does not condone fraud and seeks to improve the company's methods of reporting similar incidences. Additionally, this alternative could serve as a warning to all employees on the consequences of engaging in fraudulent practices. Finally, it could save the company's image because the investors could associate the action with commitment towards honesty and integrity, which is vital for stakeholders' trust in the brand. The challenges to this alternative include legal issues that may arise for wrongful termination and other issues. These lawsuits could be costly and might end up damaging the brand's image further.
Recommendation and Justification
Luckin should adopt the first alternative because it provides more benefits and has fewer drawbacks. Understanding the root cause of document falsification is vital in addressing such an issue. As a result, training auditors is a good way of creating awareness about the reporting systems and handling red flags effectively. If employees know where to report fraud cases and the right time to do so, it could prevent the spillover effects of fraud allegations and negative impacts on the brand image. The second alternative could be costly and may cause a massive loss of human resources needed to advance the company past the stagnation caused by the scandal. It would be detrimental for Luckin to lose almost all of its vital executive staff at the same time. It could damage staff performance and fuel survivor syndrome to the rest.
The company should provide no individual an exemption to attend the initial orientation and ongoing anti-fraud education. Managers and executives should get special training that addresses their role in the prevention and detection of fraud. A formal fraud awareness should begin once new employees get hired, including those that replace the fired executives, if any. The methods of carrying out this training could include either; live in-class instruction, recorded videos, or interactive self-study programs. The live training method is preferable because everyone can participate and provide an opportunity to collect feedback regarding the program and improvements. The training program should cover vital topics, such as what fraud is and what it is not, implications of fraud to an organization and employees, and how to identify and report fraud.
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