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In April 1997, Bre-X Minerals, a Canadian company, was supposedly one of the most valuable companies in the world. Bre-X had convinced numerous mining experts that they had rights to one of the largest gold deposits ever discovered. It was hailed as the mining find of the century The gold mine, located on a remote island in the East Kalimantan Province of Indonesia supposedly had so much gold that the actual price of gold on the open market dropped significantly due to the anticipation of an increased gold supply. Within a few months, thousands of Canadians-big-time investors, pension and mutual fund, managers and many small investors, including factory workers-got caught up in "Bre-X fever." The company's stock price shot from pennies to more than $250 per share before a 10-for-1 stock split was announced Thousands of investors believed they were on the verge of becoming millionaires The story took a sudden turn for the worse when Michael de Guzman, Bre-X's chief geologist and one of only a handful of company insiders entrusted with the mine's core samples apparently committed suicide by jumping out the back of a helicopter. Guzman's suicide was reported around the time that an independent consulting firm reported that samples from the mine had been tampered with. The firm concluded that the core samples were made to appear to be rich in gold by adding a relatively small amount of gold to the samples. In essence, the firm concluded that Bre-X was a scam of epic proportions! PERCENT INDUS CHANGE AVERA LIQUIDITY RATIOS Current ratio (current assets/eliabities) Quick ratio [(current assets inventory prepaid expenses)lcurrent liabilities] 12/31/15 CHANGE 1.21 0.35 [net saleset ending receivables] Number of days sales in A/R I(net ending receivables/(net sales/365) Inventory turnover (cost of sales/average inventory) 23.42 15.58 1.29 As the scam came to light, it was unclear who was behind the tampering. While fingers were pointed at senior Bre-X personnel, others blamed geologists in the field. Bre-X's President, David Walsh, was shocked at the news of the tampering and vowed to conduct an investigation. As is the case with many frauds of this type, numerous class-action lawsuits were filed against Walsh and other Bre-X executives, alleging that they misled shareholders. Walsh and other company officials received profits of over $50 million from selling some of their Bre-X stock the year before the tampering came to light. In the end, many people lost money as the gold find of the century turned out to be a massive hoax Questions 1. Assume you are a financial analyst who works for a major brokerage company that is heavily invested in Bre-X Minerals. a. In what ways would investigating management and directors help determine the value of Bre- X's gold prospects? b. In what ways would investigating the company's relationships with other entities help determine the value of Bre-X's gold prospects? C. In what ways would investigating the organization and its industry help determine the value of Bre-X's gold prospects? d. In what ways would investigating the financial results and operating characteristics help determine the value of Bre-X's gold prospects? 2. How were the gold industry and Canadian stock markets affected by this fraud? 3. Some of the aspects of the perfect fraud storm that were discussed in the chapter were also present in the Bre-X scandal. Which elements were common to both the perfect fraud storm and the Bre-X scandal? 4. What were some of the perpetrators' motivations to commit fraud? In April 1997, Bre-X Minerals, a Canadian company, was supposedly one of the most valuable companies in the world. Bre-X had convinced numerous mining experts that they had rights to one of the largest gold deposits ever discovered. It was hailed as the mining find of the century The gold mine, located on a remote island in the East Kalimantan Province of Indonesia supposedly had so much gold that the actual price of gold on the open market dropped significantly due to the anticipation of an increased gold supply. Within a few months, thousands of Canadians-big-time investors, pension and mutual fund, managers and many small investors, including factory workers-got caught up in "Bre-X fever." The company's stock price shot from pennies to more than $250 per share before a 10-for-1 stock split was announced Thousands of investors believed they were on the verge of becoming millionaires The story took a sudden turn for the worse when Michael de Guzman, Bre-X's chief geologist and one of only a handful of company insiders entrusted with the mine's core samples apparently committed suicide by jumping out the back of a helicopter. Guzman's suicide was reported around the time that an independent consulting firm reported that samples from the mine had been tampered with. The firm concluded that the core samples were made to appear to be rich in gold by adding a relatively small amount of gold to the samples. In essence, the firm concluded that Bre-X was a scam of epic proportions! PERCENT INDUS CHANGE AVERA LIQUIDITY RATIOS Current ratio (current assets/eliabities) Quick ratio [(current assets inventory prepaid expenses)lcurrent liabilities] 12/31/15 CHANGE 1.21 0.35 [net saleset ending receivables] Number of days sales in A/R I(net ending receivables/(net sales/365) Inventory turnover (cost of sales/average inventory) 23.42 15.58 1.29 As the scam came to light, it was unclear who was behind the tampering. While fingers were pointed at senior Bre-X personnel, others blamed geologists in the field. Bre-X's President, David Walsh, was shocked at the news of the tampering and vowed to conduct an investigation. As is the case with many frauds of this type, numerous class-action lawsuits were filed against Walsh and other Bre-X executives, alleging that they misled shareholders. Walsh and other company officials received profits of over $50 million from selling some of their Bre-X stock the year before the tampering came to light. In the end, many people lost money as the gold find of the century turned out to be a massive hoax Questions 1. Assume you are a financial analyst who works for a major brokerage company that is heavily invested in Bre-X Minerals. a. In what ways would investigating management and directors help determine the value of Bre- X's gold prospects? b. In what ways would investigating the company's relationships with other entities help determine the value of Bre-X's gold prospects? C. In what ways would investigating the organization and its industry help determine the value of Bre-X's gold prospects? d. In what ways would investigating the financial results and operating characteristics help determine the value of Bre-X's gold prospects? 2. How were the gold industry and Canadian stock markets affected by this fraud? 3. Some of the aspects of the perfect fraud storm that were discussed in the chapter were also present in the Bre-X scandal. Which elements were common to both the perfect fraud storm and the Bre-X scandal? 4. What were some of the perpetrators' motivations to commit fraud