Luckin Coffee, a beverage-selling company in China

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Luckin Coffee, a beverage-selling company in China


Luckin Coffee, a beverage-selling company in China, rapidly grew since its opening in 2018. Their financial reports showed a tremendous number of sales each quarter, increasing investor confidence and further driving their stock price up. Some individuals became wary of their claims and suspected fraud. In January 2020, the company became involved in an accounting fraud scandal. The company’s problem was a workplace culture of corruption. Three alternatives for improvement:
1. The first alternative is to remove all employees who were involved in the fraud and hire new professionals with experience and reputable careers.
2. The second alternative to decrease and avoid serious employee misconduct is to implement a program of ethics training to employees of all levels, from front line employees to senior management
3. The last alternative is creating a fraud hotline where employees can report any suspicious activities.
REQUIRE: Discuss alternatives in terms of cost, time, and implementation. Recommend one alternative. Use sources.

Explanation & AnswerSolution by a verified expert

Business Case Project: Luckin Coffee
Alternatives for Improvement
Alternative One
The first alternative is to replace all the employees suspected of committing fraud with new employees. Fraud perpetrators, executives or employees, need to know that such behavior has severe consequences (Rezaee, 2005). Any executive or employee who engages in accounting fraud scandals should get dismissed from the company. Such fraud could damage the brand image and may cost substantial money in the corporate world. If the firm has weak control structures or perpetrators are rarely punished, the opportunity to engage in financial statement fraud increases further.
There are many direct and indirect costs associated with this alternative. Employees coming in from other positions and organizations to fill a vacancy left by those fired may require training. This training cost can vary depending on type and period, but generally, the company could incur a considerable expense if new employees are needed regularly. Luckin Coffee will need to fund job advertisements, hire recruiters and in some cases, cater for candidate expenses during interviews. There are indirect costs associated with this alternative, including but not limited to a possible decrease in productivity, overworking remaining staff, and lost talents. Sometimes there might be lawsuits filed by the fired employees, which might cause legal costs on the company.
Luckin Coffee has to devise a recruitment plan, write a job description, advertise the position, carry out the initial screening, interviews and assess the applicants. This process could take a considerable amount of time. The training process for the new employees will also take time.
Luckin Coffee should start by identifying the duties and responsibilities of the position even before the employee gets fired. Next, all other employees must be notified of the process to avoid raising uncertainties regarding job security. Then, the position could be filled temporarily by an internal employee. Having a strong bench of talent at Luckin Coffee could be crucial in filling these positions without impacting productivity. Once the company has identified a permanent candidate, training should begin immediately.
Alternative Two
The second alternative is to decrease and avoid misconduct at the workplace through a series of ethics training programs for all employees and managers. The moral character of businesses gets tested by events such as scandals and the falsification of documents. According to Singleton et al. (2003), these trends imply that either ethical standards have reached a new low or ethical behavior has gotten redefined. In most instances, because of a poor code of ethics, managers involved in fraud often go undiscovered by external auditors. Singleton et al. argue that there is a connection between corporate ethics and fraud. It is vital to develop or revise ethics policies or codes of conduct for internal controls and fraud prevention. Studies indicate that companies that demonstrate a commitment to their ethics policies have a better bottom line. Singleton et al. note that a weak ethical environment, such as lack of training or ethics policy, can weaken internal control systems and promote fraud. The company can also use training to vividly illustrate the outcomes of those caught to deter potential fraud incidences in the future. Once the employees get the necessary ethics training, they will know the ethics policy's guidelines. Many will choose to be ethical, consequently raising the willingness to report ethics violations to benefit the firm.
The company's only main cost in this alternative is the actual training process. The trainer may be a professional from a third party or a company representative. Minor costs include the cost of time spent in the training other than on their duties.
The training time should not coincide with the most productive hours of their workday. Every employee has to participate or sign up for a convenient training schedule, in which they have to give feedback on their progress. It could take weeks to months, depending on the training.
The company should start by designing actionable rules that are specific and which every employee can adopt with ease. After there is a firm foundation, the company can initiate discussions on more critical topics during the training. These topics might include diversity, regulatory and compliance training, customer privacy and data protection, and company code of ethics. Luckin Coffee could use incentives to motivate those that show excellence in the trained topics. It could also come up with ways to build a long-term ethical culture that minimizes potential fraud scandals.
Alternative Three
The third alternative is to create a fraud hotline where employees can report any suspicious activities. This alternative must involve a series of practices to ensure the reported fraud incidences get addressed accordingly. According to Hillison et al. (1999), an employee hotline is the single most cost-effective means for detecting occupational fraud and abuse. Many organizations have taken this route because honest employees might observe the occurrence or commission of scandal but have no way to report it anonymously. Most scandals are often known to others. Organizations need to transfer such information from those who have it to those who need it. A fraud hotline provides that opportunity. According to Buckhoff (2003), a study found that organizations with fraud hotlines cut their fraud losses by 50% per scheme.
The company will incur the cost of hiring a third party to provide the whistleblowing service, and this cost may be high depending on the legislation in China's market. Language diversity in the company may cause extra expenses for translation, on-call interpreters, multi-lingual operators, or the set-up of multi-language online reporting options. The company will need incident management software to manage the reports and train employees on the entire process and how to go about it.
This alternative takes the least time because training is only basic. The process of implementing a hotline service could be prompt, depending on the availability of a vendor.
The first critical thing for Luckin Coffee is to establish trust and buy-in. The presence of an ethics and compliance hotline does not imply that all employees are comfortable using it. They might fear retaliation or may believe that their concerns could get dismissed. It is necessary to ensure everyone understands how the company will handle the reported cases. The company must explain the intended purpose of the hotline. What types of concerns will individuals report? What will happen after reporting a fraud incidence? Addressing these issues could help ensure a smooth implementation.
Luckin Coffee should adopt the third alternative. Employee fraud hotline is the most cost-effective alternative in detecting and reducing incidences of fraud in the company. The first and second alternatives involve excessive expenses. For instance, it would not be reasonable to fire all employees suspected to engage in fraud scandals because, in the process, the company's equity could drop significantly. But, this third alternative allows employees to report potential fraud without fear of reprisal. Not only is this alternative an effective detection tool, but also it enhances deterrence. Potential perpetrators will likely have second thoughts when considering the risks of being caught. Once a reported case is verified, the company can sack the perpetrators to serve as an example for others. With time, the culture of corruption can become so hard to thrive any longer, and finally, the fraud cases could diminish.

Buckhoff, T. A. (2003). The benefits of a fraud hotline. The CPA Journal, 73(7), 62.
Hillison, W., Pacini, C., & Sinason, D. (1999). The internal auditor as fraud‐Buster. Managerial Auditing Journal, 14(7), 351-363.
Rezaee, Z. (2005). Causes, consequences, and deterence of financial statement fraud. Critical Perspectives on Accounting, 16(3), 277-298.
Singleton, T., King, B., Messina, F. M., & Turpen, R. A. (2003). Pro-ethics activities: Do they really reduce fraud? Journal of Corporate Accounting & Finance, 14(6), 85-94.

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