Starbucks competitor, Luckin Coffee, is in the midst of an accounting scandal that has US lawmakers furious, according to the New York Times.
Last year, Luckin Coffee raised over half a billion dollars form Wall Street. By the end of 2019, the company's market capitalization was almost $12 billion. However, a rumor of accounting fraud started to sprout and almost a month ago fully blossomed when the company revealed that its 2019 revenue was fabricated. The company lost over $5 billion in market cap one day and shares have been halted on the NASDAQ index since.
The desire to block Chinese companies from Wall Street has bipartisan support. Washington and Beijing's deteriorating relationship is only getting worse. “The Luckin Coffee scandal is just one of many examples of Chinese fraud, and it should be a major wake-up call for policymakers and regulators that the time for action is now,” said Senator Marco Rubio.
China's regulating agency has opened an investigation and asked for participation from the US. However, there is skepticism that the investigation is more than a formality to soothe tempers across the world. “If Chinese companies want access to the U.S. capital markets, they must comply with American laws and regulations for financial transparency and accountability,” Rubio said.
Rubio and three other senators have proposed the Equitable Act. The bipartisan bill would require Chinese companies to abide by US audit rules and requirements. The Luckin accounting scandal has only exacerbated the situation for Chinese companies.
Luckin's shares will be halted until the company regains its footing. The SEC is pursuing an investigation of its own that would allow it access to corporate documents and executives. This past weekend, Chinese authorities raided Luckin's offices.
China claims that they are willing to cooperate with US regulators, but Jay Clayton, chairman of the S.E.C., recently stated that they were almost powerless when it came to investigating Chinese companies.
The accounting with Luckin was not the catalyst China was hoping for to save its relationship with the US.