Name: Fatima

ID: 20232036

Course: Accounting 1

Instructor:

Submission date: 29 august 2023

Accounting System and Internal Control in Cash Re

lated Frauds and Receivables Reporting

Table of content:

TASK A
1. INTRODUCTION TO THE COMPANY
2. THE ACCOUNTING SCANDAL OF LUCKIN COFFEE
3. CONTRIBUTING FACTORS OF THE INCIDENT
4. CONSEQUENCES
5. RECOMMENDATIONS AND SOLUTIONS
6. CONCLUSION
7. REFERENCES

TASK B
8. MAINTAINING ACCOUNTS RECEIVABLES OF LUCKIN COF
FEE INC.
9. RECORDING ESTIMATED UNCOLLECTIBLE ACCOUNTS
10. REFERENCES

[Task A]

Luckin coffee fake revenue scandal

Introduction:

A chain of coffee shops and a public company in China called ‘Luckin Coffee’ serves

coffee, different beverages, and snacks. In 2017, it was co- founded by Jenny Qian Z

hiya, who was a former executive at car rental, and Charles Zhengyao Lu, who was

a serial entrepreneur, and it was finally established in Beijing. In January 2018, Lucki

n Coffee debuted its first locations in Beijing and Shanghai after becoming establishe

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d in October 2017. It managed 9,351 stores as of March 2023, including 3,041 partn

ership outlets and 6,310 self-operated stores. In June 2022, the number of monthly a

ctive customers surpassed 500 million. The business runs restaurants, stores, and ki

osks that provide food, coffee, and tea. Customers started using the online app to or

der and pay for the drinks online. Xiamen, a city in China, serves as the present hea

dquarters for Luckin coffee. Over time, Luckin Coffee quickly grew, surpassing the n

umber of Starbucks locations in China by 2019. Luckin obtained exposure to the US

stock market as well after submitting a request to the Nasdaq and beginning to trade

at $17 per share. Early in January 2020, the business secured further funds through

the issuance of convertible bonds (these bonds have features of both equity as well

as liability) and shares totalling to an amount of $821 million to invest into the deploy

ment of vending machines that would sell hot drinks and snacks that were freshly pre

pared. A $400 million five-year convertible bond was also being made available sepa

rately.

The accounting scandal:

Investors who thought it would become the biggest coffee chain in the world's fastes

t-growing beverage markets eventually contributed $864 million in debt and equity. B

ut it seems that the results were too fantastic to be true. Early in 2020, a short seller r

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aised concerns about the company's bookkeeping. Later, it was discovered that the c

orporation had overstated sales and earnings by 45%, or over $300 million dollars.

On April 2, 2020, the business disclosed that an internal investigation had revealed t

hat Jian Liu, its chief operating officer, had falsified the revenues. It was discovered t

hat Luckin had been employing fake coupon sales to raise its income from the begin

ning of April 2019, and that three different fraudulent operations that had been carrie

d out by its workers. Deals were made by forging coupons and distributing them to th

ree different consumer groups: individual buyers, business buyers, and sales to thir

d-party businesses, who served as middlemen who would resell the coupons to indiv

idual buyers. In fact, several of Luckin's management and staff were aware of the fra

ud and ruses.

The China Securities Regulatory Commission said the next day that it will look into th

e firm for fraud. Due to the fraud investigation, the American stock exchange stopped

trading all Luckin shares on April 8. The shares of the corporation dropped by more t

han 80% in April. Several of his subordinates, including Luckin's chief operational offi

cer Jian Liu, were found to have committed fraudulent conduct, including falsifying sa

les, according to the investigation. Luckin said that company will pursue legal action

against individuals responsible and suspended Liu and the workers involved in the m

isbehaviour.

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The 2 and a half-year-old business warned investors not to rely on its earlier financial

statements and earnings reports for the nine months. The coffee business previously

reported net revenues of $413 million for the first nine months of 2019.

Contributing factors of the incident:

Former chief executive officer Jenny Qian, former COO Jian Liu, and former Chairm

an- Charles Zhenyao Lu failed to maintain the internal controls required to guarantee

precise accounting records and transactions, which has later affected the business.

They CEO has ignored his duties and responsibilities, therefore scamming the invest

ors with the falsified financial statements for his own gain. Further, this act has led to

the fall of Luckin coffee while also affecting its stocks greatly.

Consequences of the fraudulent act:

The US Securities and Exchange Commission fined Luckin for firing multiple employ

ees. It also declared bankruptcy in the United States after taking more than a year to

put together its business operations. The stock of the corporation was delisted, altho

ugh it is still traded today.

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Due to worries that American financiers had sufficient knowledge of the Chinese mar

ket to evaluate the validity of Luckin's claims, the scandal also resulted in substantial

changes for Chinese firms seeking to go public in the United States.

Due to the financial crisis, Charles Lu was compelled to sell some of his ownership st

akes in CAR Inc. in order to meet lender requirements. Investors losses in the billion

s of dollars meant that eventually something—or rather someone—had to yield. The

examination into the scandal was conducted by the company's Committee, which rel

eased its findings without a great deal of publicity. It stated, "In the course of the Inte

rnal Investigation, the Committee and its advisors reviewed over 550,000 documents

collected from over 60 custodians, interviewed over 60 witnesses, and performed ext

ensive forensic accounting and data analytics testing," the report explained. The last,

proverbial nail in Luckin's coffin; was the resignation of chairman Charles Lu on July

15, 2020. After Lu and the others cleaned the table, it was time to start writing the ne

xt chapter for the company.

The aftermath:

Given the mistrust surrounding Luckin's financial statements and the fact, that it conti

nued to operate at a loss, there was no way for the company to access the market fo

r capital or investors from institutions for new funding. Closure because of Covid sim

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ply fueled the fire's already raging flames. The dollar 9 million penalty that Chinese r

egulators levied on the company in September 2020 served as a prologue to future p

enalties that hung over the firm's head. Luckin Coffee received a $180 million penalti

es from the SEC in December 2020 while not acknowledging or disputing the claims

made by its investors. Guo Jinyi, the company's new chairman and CEO, effectively t

urned around the ship, culminating in Starbucks being surpassed in terms of shop co

unt in China back in March 2022. After successfully escaping bankruptcy a month lat

er, Luckin Coffee saw its first profitable quarter a few weeks later.

Recommendations and solutions:

Firstly, it is critical to verify all the business transactions on a weekly or monthly basis

to avoid any mistake that could lead to incorrect data. Luckin coffee didn’t maintain a

precise financial record which made it easier for the Former chief executive officer Je

nny Zhiya Qian, former COO Jian Liu, and former Chairman Charles Zhenyao Lu to

scam the investors with falsified financial records.

Secondly, Luckin's management failed ethically as they generated fabricated financia

l records and purposefully misrepresented the firm to investors to benefit themselves.

All corporate levels, including senior management department, the audit committee,

and internal; and external auditors are involved in this case's ethics analysis. the topi

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cs covered include conflicts of interest, dishonesty, abusing positions of power, and f

ailing to uphold ethical standards.

Fraud is frequently the result of improper behaviour on the part of top management,

employees on the ground, auditing staff. However, it is the responsibility of manage

ment to guarantee that moral standards are upheld inside a business. Several moral

actors in Luckin's case neglected to carry out their moral obligations, which resulted i

n the accounting scandal and fraud. Thus, maintaining ethical standards by the senio

r management, board of directors etc, is important to avoid such mistakes in the futur

e.

Conclusion:

The fraud and accounting scandal at Luckin are the result of several different parties.

For the purpose of identifying fraud early and remaining consistent with the principle

of commutative justice, Luckin should have adopted and enforced a stricter code of c

onduct throughout the organization, from senior management to frontline employees.

External auditors need to have taken an active part in pointing out the company's wr

ongdoing and held off on promising financial success to third parties until it had com

pleted its due investigation. A more thorough and strict method may have discovere

d Luckin's deception earlier. It is hoped that the Luckin case would increase awaren

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ess of the impact multilevel collaboration has on a company's moral culture and finan

cial ethics.

References:

1. https://www.restaurantbusinessonline.com/financing/luckin-coffee-emer

ges-bankruptcy-two-years-after-accounting-scandal#:~:text=A%20short

%20seller%20began%20questioning,U.S.%20Securities%20and%20E

xchange%20Commission.

2. https://productmint.com/luckin-coffee-scandal/#:~:text=Executive%20S

ummary%3A,led%20to%20Luckin%20going%20bankrupt

3. https://www.reuters.com/business/retail-consumer/luckin-coffee-reache

s-175-million-class-action-settlement-over-accounting-fraud-2021-10-2

6/#:~:text=Luckin%20Coffee%20in%20%24175%20mln%20class%20a

ction%20settlement%20over%20accounting%20fraud,-By%20Jonatha

n%20Stempel&text=NEW%20YORK%2C%20Oct%2026%20(Reuters,

share%20price%20by%20falsifying%20revenue.

4. https://sevenpillarsinstitute.org/case-study-luckin-coffee-accounting-fra

ud/

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 Task B

Maintaining Accounts Receivables:

In order to complete this task, the audited accounts receivables have been analyzed

using the financial statement of the firm LUCKIN COFFEE. The allowance for doubtf

ul accounts is used to write off accounts receivable for this firm that are ultimately det

ermined to be uncollectible or for whom collection attempts have been unsuccessful.

Bad debt allowance for the company's accounts receivable was US$0.03 million as o

f December 31, 2021, and 2022, respectively.

Recording estimated uncollectible accounts:

To bring credit losses down to the amount it anticipates being collected, The Luckin

Coffee Inc. maintains an expected reserve for credit losses. The firm examines and u

tilizes its previous loss experience with the necessary changes when estimating pote

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ntial credit losses. The firm evaluates the collectability of these accounts receivable u

sing the information that is currently available. This data may relate to previous occur

rences, present circumstances, and information that may be internal, external, or a c

ombination of the two. When estimated and actual bad debts differ significantly, the c

orporation periodically modifies the allowed proportion. The company also makes a s

pecial provision during the period in which a loss is calculated if there is compelling i

nformation suggesting that these financial assets have the potential to be unrecovera

ble. When all attempts at collection of these amounts have failed, the remaining valu

e of these financial assets is written off. Thus, the company maintains and records it

s accounts receivables using the allowance for uncollectible records method to calcul

ate the net accounts receivables by the end of the accounting period.

References:

1. https://investor.luckincoffee.com/static-files/0c0ffe7f-d5d9-4b7b-872b-b4

6eb2a6e511

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