Earnings management refers to artificial inflation or deflation of
financial numbers, such as revenues, profits, or earnings per share. It
refers to the use of accounting skills to create financial statements
that present an overly positive view of a company's business
activities and financial condition. Many accounting rules and
principles require a company's management to exercise judgment in
following these principles. Earnings management takes advantage of
the way accounting rules are applied to create inflated financial
statements（Tuovila 2022） Five of the more popular earnings
management techniques include: recording income too early,
recording false income, boosting income with one-time gains, shifting
current expenses to later or earlier periods, and failing to record or
improperly reducing liabilities.
The first company that I want to discuss for this week is the Luckin
Coffee. The company initially made its products a household name in
China in a short period of time due to its successful market expansion
and new business model. It launched an IPO of American Depositary
Shares in the United States in May 2019 and listed on NASDAQ. In
2020, Luckin Coffee has been the subject of a complaint by the U.S.
Securities and Exchange Commission for grossly deceiving investors
in its financial reporting by misrepresenting the company's revenues
and expenses to meet the company's earnings expectations to
achieve rapid growth and increased earnings (SEC). In the case,
Companies boost revenue in their financial statements by Recording
fictitious revenue. Lakin Coffee uses many coupons to attract
customers. These represented a significant portion of the revenue
on the income statement. However, over time, the company began
selling coupons to a large number of fake customers. Most of these
customers were fraudulent or were impersonated by internal
employees and relatives, and even included some fake shell
companies (Chung 2021). Luckin Coffee documented these
fraudulent sales in its earnings reports to deceive investors.
Another case I want to talk about is Panasonic. SEC announced in
2018 that Japan-based Panasonic Corporation will pay more than
$143 million to settle allegations of Foreign Corrupt Practices Act
(FCPA) and accounting fraud involving its global avionics business.
Panasonic Corporation's U.S. subsidiary, Panasonic Avionics
Corporation (PAC) is a supplier of in-flight entertainment and
communications systems. The company fraudulently inflated pre-tax
and net income by recognizing more than $82 million in revenue in
advance for the fiscal quarter ended June 30, 2012. This fraud was
accomplished by PAC backdating its agreement with the airline and
providing misleading information to PAC's auditors (SEC).
Reference:
Tuovila, Alicia. August 09, 2022. Earnings Management.
https://www.investopedia.com/terms/e/earnings-management.asp
SEC. Dec 16, 2020. b Luckin Coffee Agrees to Pay $180 Million
Penalty to Settle Accounting Fraud Charges.
https://www.sec.gov/news/press-release/2020-319
Chung, Emma. August 27, 2021. Luckin Coffee Accounting Fraud
https://sevenpillarsinstitute.org/case-study-luckin-coffee-
accounting-fraud/
SEC. April 30, 2018. Panasonic Charged with FCPA and Accounting
Fraud Violations
https://www.sec.gov/news/press-release/2018-73
