Read the attached article “Ernst & Young Says It First Found Accounting Issues at Luckin” and view the provided video. Provide detailed responses for each of the assigned questions. Share your personal thoughts and ideas. 

Questions

1. Explain the accounting irregularities that have taken place at Luckin.
2. Discuss the stakeholders impacted by Luckin’s elicit accounting practices.
3. Why did Ernst & Young go public with Luckin’s accounting irregularities?

Video

https://www.youtube.com/watch?v=KnqQPWD4FJc (Links to an external site.)

Article  

Ernst & Young Says It First Found Accounting Issues at Luckin

Luckin’s Nasdaq-listed shares fell more than 75% Thursday after the Chinese company accused its operating chief and others of financial misconduct.

By 

Quentin Webb and 

Joanne Chiu

Accounting firm Ernst & Young said it uncovered the problems at China’s Luckin Coffee Inc., which hammered the stock price of the upstart challenger  (Links to an external site.)to Starbucks (Links to an external site.) Corp. in the country and cast doubt over a large part of its sales last year.

Luckin’s Nasdaq-listed shares fell more than 75% Thursday after it said an internal investigation indicated its chief operating officer and others had fabricated much of its reported revenue  (Links to an external site.)in 2019. Shares were up slightly Friday morning.

While auditing Luckin’s financials for 2019, the accounting firm said it found some “management personnel engaged in fabricated transactions which led to the inflation of the Company’s income, costs and expenses” from the second quarter to the fourth quarter.

• Analysis: What Investors Can Learn from Luckin’s Caffeine Crash (Links to an external site.)

“Based on such findings, EY made a report to the Company’s Audit Committee,” Ernst & Young said in an emailed statement Friday. It said that prompted Luckin’s board to start an internal investigation.

Ernst & Young Hua Ming LLP is the entity in China that audits Luckin. EY is the term for the global umbrella organization to which it and affiliates such as Ernst & Young LLP in the U.S. belong.

EY, which has audited Luckin since the coffee group’s founding in 2017, said it wouldn’t comment further, citing client confidentiality.

In three years Luckin, one of a string of aggressive Chinese startups (Links to an external site.), has risen to challenge Starbucks as China’s largest coffee chain. Its listing prospectus highlighted how it was “disrupting the status quo of the traditional coffee shop model” with mobile apps and pickup-only stores.

Since May 2019 the company and some of its early backers have raised nearly $1.8 billion through an initial public offering (Links to an external site.), a convertible bond sale, and a follow-on stock sale.

On Thursday, Luckin said the investigation suggested its operating chief and some of his reports had engaged in misconduct, including fabricating transactions, which inflated both sales and expenses.

Based on previously reported results and company forecasts for the fourth quarter, the 2.2 billion yuan ($310 million) of sales affected would represent nearly half of net revenue in that period.

The stock’s sharp decline was a victory for short sellers, who had bet against the company.

Matthew Unterman, a director at S3 Partners, a New York-based financial data provider, said there had been elevated demand from hedge funds to sell Luckin’s stock short ever since the IPO.

Mr. Unterman said recent short interest was equivalent to a very high 35% of Luckin’s U.S. securities. He said those investors likely made $686.7 million in gains on paper Thursday.

Short sellers seek to profit from share-price declines by selling borrowed stock, and later closing their trades by buying shares at a lower price.

In early February, high profile short-selling firm Muddy Waters LLC endorsed an anonymous report that attacked Luckin’s financials, governance and business model.

Luckin said the report was false and misleading.

Beijing-based private-equity firm Centurium Capital, an early investor in Luckin, said Friday it supported the decisions and actions of the board, and the investigation that was being pursued to protect shareholders.