QUESTION 1

Luckin Coffee Incorporation (Luckin Coffee) is a Chinese coffee company and coffeehouse chain. It was founded in Beijing in 2017. As of January 2020, it managed 4,507 stores and exceeded the number of Starbucks stores in China. Most of its stores are small "pick-up" locations in office buildings or college campuses that serve for online orders' pickup and delivery. In April 2020, the company revealed that it had inflated its 2019 sales revenue by up to US$310 million. It resulted in the stock price crashing and several executives being fired. Trading was suspended and the company was delisted from NASDAQ on 29 June 2020. On 31 January 2020, short-selling firm Muddy Waters Research published an anonymous page report on Twitter, claiming that Luckin Coffee had falsified financial and operational figures. The report claimed that the number of items sold per store was inflated by at least 69% in the third and by 88% the fourth quarter of 2019, supposedly backed by 11,200 hours of video footage. Before the U.S. stock market opening on 3 February 2020, Luckin Coffee responded by categorically denying all allegations made in the report. The company argued that the report raised malicious accusations and false allegations with unsubstantiated evidence and flawed methodology. In September 2020, China's markets regulators fined a group of firms including Luckin Coffee for a combined $8.98 million in relation to Luckin's falsification of financial and operational figures.

(Adapted from: https://en.wikipedia.org/wiki/Luckin_Coffee)

Required:

(a) Explain what motivates earnings management in Luckin Coffee. (4 marks)

(b) Evaluate three consequences of Luckin Coffee financial fraud. (6 marks)

(c) Propose three ways to ensure fraud and financial scandals like Luckin Coffee can be avoided. (10 marks)

Financial Accounting expert help me to solve this question. Thank you in advance.