Luckin Coffee’s Accounting Scandal: Leaving Investors with a Bitter Taste

Abstract

Luckin Coffee Inc., the would-be Starbucks of China, landed in hot water when short seller Muddy Water Research exposed the alleged fraud at the company of fabricating its financial and operational data. Luckin initially denied the allegations but its internal investigations came up with a revelation of fabricated 310 millions of dollars in sales. Luckin shares crashed by 80% in U.S. trading and its trading at Nasdaq came to a halt along with a delisting notification. The company’s IPO worth $645 million was the 2^nd largest in the US by a Chinese firm. The disclosure not only damaged the investors’ confidence but also renewed doubts about Chinese corporate governance and financial reporting which may bring a closure to the country’s overseas IPOs. Even though Luckin’s aggressive growth lured the investors, the sustainability of its business model had always raised many eyebrows. The institutions involved in reporting and IPO due diligence are having questions lurking at their reputations. It is a wake-up call for the investors to be more cautious of Chinese firms, with high growth business models, that plan to go public in the US. Was the Luckin Coffee Inc.’s business model too good to be true? Who is responsible for this accounting debacle-the management, the audit committee, the underwriters or the lax corporate governance? How is this scandal going to impact the investors’ perception towards China’s overseas IPOs and the future US listings by Chinese companies?