28 Mar When Your Luck(in) Runs Out: An Ethical Practice Case Study By AGS Staff

We’ve all had experiences with nonprofit leadership who would do almost anything for funding. But have you considered the ethical implications that can go along with the ‘money at all costs’ mindset? We’re talking about things like: How far is your agency willing to go? Would they misrepresent revenue to funders? Would they inflate the numbers served so it appeared they were helping more people than they really were? Welp. Luckin Coffee (LC) boldly went there and got caught. But there is much to learn from the error of their ways, so let’s take a look at LC’s actions through the eyes of a grant professional to examine the ethics (or lack thereof) of it all.

Founded overseas in 2017, LC envisioned providing coffee to its predominantly tea-drinking target population. To maintain relatively low overhead, they operated kiosk-sized stores overseas accepting affordable, pre-paid coffee orders, to-go or for delivery. Customers ordered exclusively through the company’s smartphone app and were regularly rewarded for their loyalty with in-app perks and freebies. But, by 2018, the company’s operating expenses were almost triple its sales and by 2019, the organization got caught with their hands in the cookie jar. Upon careful examination of LC’s budget and financial documents, numbers served, and audit records, a prudent grants professional would likely determine that LC has committed the following ethical violations according to the Grant Professionals Certification Institute (GPCI) competencies. (See below for details on GPCI competencies violated).

In 2019, LC reported an almost six-fold increase in quarterly sales (GPCI 6.2). This, despite the fact they were continuously incurring more debt in operating expenses. Upon inspection of their budget and finance documents, it was discovered that LC inflated its revenue to potential funders and existing stakeholders to the tune of about $310 MIL (GPCI 6.2, with a dash of 6.6 and a side order of 6.8). The average cost of items sold was discovered to be lower than the company reported. It was also discovered that LC grossly inflated the number of actual customers by intentionally skipping numbers in their numbered receipt/ticketing system, which was supposed to sequentially track each customer purchase made. This resulted in numerous missing customer numbers. For example, they could show receipts for having served customers #1 through #100, but the next recorded ticket number would be #1100 (with no record of sales having occurred for purchase numbers 101 through 1099.) As a result of their facade of success, LC was able to become a publicly traded company on the U.S. stock exchange market. Timing-wise, the fraud/misstatement of funds occurred one month before LC made it onto the stock exchange. This could lead a prudent grant pro to the conclusion that LC knowingly misrepresented its finances to appear more ‘attractive’ to potential investors (or in grant terms, funders) (GPCI 6.2 and a full order of 6.8). To their detriment, investors unwittingly relied on the misrepresented numbers to invest in the now defunct LC (ibid). Among a plethora of mounting fraudulent misrepresentations, auditors found evidence of the fraudulent transactions, but the ethical and financial damage had already been done.

The moral of the story: even if no one else does, grant pros must always consider the ethical implications. If you see your agency headed towards an inadvertent unethical path, don’t let their luck run out – help them right the ship.

Competency #6: Knowledge of nationally recognized standards of ethical practice by grant developers. Skills in order of appearance in this blog: #2: Identify circumstances that mislead stakeholders, have an appearance of impropriety, profit stakeholders other than the intended beneficiaries, and appear self-serving; #6: Identify unethical and illegal expenditures in a budget; and #8: Distinguish between ethical and unethical commitment, performance, and reporting of activities funded by a grant.