632 Discussion 2

When Luckin Coffee (NASDAQ: LK) (Luckin or the Company) went public in May 2019, it was a business attempting to instill the culture of drinking coffee into Chinese consumers through cut-throat discounts and free giveaway coffee. Right after its IPO on NASDAQ, the Company had evolved into a fraud by fabricating financial and operating numbers starting in the 3rd quarter of 2019. It delivered a set of results that showcased a dramatic growth in its revenues and sent its stock price up over 160% in a little over 2 months. Not surprisingly, it wasted no time to successfully raise another $1.1 billion in January 2020. Luckins management knew what investors were looking for, how to position itself as a growth stock with a fantastic story, and what key metrics to manipulate to maximize investor confidence.

How could this accounting fraud have been avoided? Will it impact future Chinese company IPO listings in the United States? Were there any red flags you spotted in their reported numbers?