Fraud Examination – Bre-X Minerals

Bre-x Mineral Company was regarded as one of Canada's top and most valuable businesses in April 1997. The corporation took things a step further by persuading a number of experts that they were the owners of one of the greatest gold deposits ever found in Canada. These attracted attention since they were said to be the mining of the century and were found on a remote Indonesian island in the East Kalimantan province. The province supposedly had large deposits that made the actual price of gold in the market to depreciate significantly as a result of the rise in the supply of gold from the reservoir (Henry & Robinson 2015). Within a very short life span, most of the Canadian investors including the managers, pension as well as mutual fund became interested in the company progress. Every investor rushed to grab the company’s share as the company looked more promising for making the investors become millionaires. As a result, the price of the shares increased to more than $250 per share.

The promising nature of the company took a sudden twist when the Michael de Guzman, the company’s geologist took his life by jumping out of a helicopter. The incident happened after the report from the consulting firm exposed that the sample of the mine was tempered. The company concluded that the sample was made to appear more appealing to the investors by been rich in gold. As the consulting firm made it open that the allegations were factual and the project by the Bre-x was a swindle, it was unclear who was behind the tempering of the gold sample to trap the investors in the company (Henry & Robinson 2015). As some blamed the geologist, others pointed fingers to the senior personnel of the Bre-x. Several lawsuits were filed against some Bre-x executives and Walsh for misleading the shareholders. The company officials and Walsh made a large some profits from the sale of the Bre-x stock which was over $50 million before the exposure of the scam. Most of the investors lost their money in the end as the gold turned out to be a scam.

Fraud Triangle model and identification of the fraud hypothesis in the case

The fraud triangle is a mechanism that is designed to explain the reasons behind staff member’s decision to engage in workplace fraud. The framework includes the pressure on an individual, the opportunity to commit fraud, and the ability to rationalise the crime.

Pressure

This is the motivation of an individual to commit the offence, and it can be either workplace debt pressure including a shortfall in the organisation’s revenues or personal financial pressure which can be personal debts. Primarily the individual may perceive the pressure as unsolvable by legal, sanctioned routes, orthodox, and unshakable with the colleagues in the firm who can offer assistance (Lou, & Wang 2011). From the case study, it is evident that the report about the samples from the mining was tempered with. The geologist and the management of the organisation worked together to alter the report of the ores this include filling the ores with gold purchased from the locals. Consequent, the geologist was needed recognition from the management, so they devised a mechanism to get rich faster. Similarly, the pressure from the management on the geologist played a crucial part in the fraud as they were against time to meet the organisations target. Primarily, the organization was experiencing financial difficulties and the pressure from the management made the employees engage in the fraudulent activities.

Opportunity

The chance to commit fraud is the means that an organisation will use to defraud the institution. The staff member sees an opportunity through which he or she can abuse his or her position to solve a perceived unshareable problem (Lou, & Wang 2011). Through such a mechanism they recognise that other workers will not identify their scheme in the firm. Moreover, at most time people result in solving the problem in private which give the critical perception of the viable opportunity to commit the fraud. The organisation had weak internal controls that the geologist and some top management officer exploited to commit the fraud. Primarily, the sample score was authorised by the same people who were conducting the research leaving a weakness in the control system. Moreover, the organisation inefficient financial and quality oversight that could have detected the fraud early enough. The organisation gave the management power to exercise discretion over reporting. The weak board of directors was the primarily reason why the organizations employees resulted in committing fraud. The directors were reluctant on following the organization reports.

Rationalization

The rationalization means ability to rationalise the crime. Rationalization requires that the fraudster to justify the offence in a model that is acceptable to the fraudster internal moral compass (Lou, & Wang 2011). In this case, the fraudster is the officials who made allot of money from the scheme. The rationalisation factors of the Bre-X management to commit the fraud was first, to keep the stock’s price high. Secondly, the fraud was for the benefit of the organisation. Other factors that the management of Bre-X considered was that all organisation use aggressive practices and that they will offset the fraud wit future positive results. The scam led to many people losing their money including casual workers. Some of the arguments by the officers included in the dishonest employers and needed to take care of the family which seems as to mitigate or minimise the harm done by the crime.

The hypothesis of the case is reporting false core sample report to cause the prices of gold in the market and the prices of the shares of the organisation to skyrocket. This results to the officials of the corporation making money through the sale of association’s share. Moreover, the increasing stock prices attract more investors. This results to some people benefiting from the scheme while others are losing investments. The scheme used to defraud investors is through false reports and adding a small amount of gold to the sample to make the look productive.

Analysis of the financial statement

The financial information of the company available is only the liquidity ratios. The current ratio of the firm stands at 1.12 which is small. However, the company’s short-term asset can pay off the short-term debts, but the margin is tiny. If the company shareholders were to know the real current ratio of the business, they would have resulted in selling their share, and the organisation could have crumbled to the ground. The acceptable current ratio ranges between 1.5 and 3. The quick ratio is for the firm is 0.35. With a quick ratio of below one, it means that the organisation will have a hard time convincing creditors. The acceptable range of the current ratio is 1.0:1 (Henry & Robinson 2015). The 0.35 quick ratio indicate that the organisation has a weak liquid current position. The inventory turnover for the firm was 1.29 which was higher than the average stock. This suggests that the company was facing some financial problems and overcoming such problem it hand to engage in manipulation of reports to make the company look good and dupe the shareholders.

Case study questions

Assume you are a financial analyst who works for a major brokerage company that is heavily invested in Bre-X Minerals

Question 1 (a): In what ways would be investigating management and directors help determine the value of Bre-X’s gold prospects?

The directors and management of an organisation have a lot of information cornering the affairs and performance of a firm. Primarily, the compensation they receive mainly reflect the earnings of the company(Lou, & Wang 2011). Therefore the final package they receive as salary and bonus from the organisations will be crucial in shedding light on the value of the teams gold.

Question 1 (b): In what ways would investigating the company’s relationships with other entities help determine the value of Bre-X’s gold prospects?

Bre-X Mining relationship with another firm can play a significant role in determining the value of the gold prospects. For instance banks, tax institutions, suppliers, and creditors can assist in determining the value of gold through estimation of transactions(Usman & Shah 2015). Nearly, all significant transactions should be transacted through the bank or other financial institutions providing a perfect opportunity for investors to determine the value of gold prospects because the financial and tax institutions can provide such data.

Question 1 (c): In what ways would be investigating the organization and its industry help determine the value of Bre-X’s gold prospects?

The investigating firm needs to understand the issues concerning fraud and the mechanism the can employ to unearth the truth. Primarily, the industry is composed of different market shares for its products(Lou, & Wang 2011). Especially, the investigating firm can use its influence to get information that will be important in determining the value of gold in the enterprise. This would be mainly by using estimates to establish the value of the gold prospects. Other organisations in the market which have experienced a similar type of fraud can be a major stepping stone in identifying and estimating the gold prospect of Bre-X Mining.

Question 1 (d): In what ways would investigating the financial results and operating characteristics help determine the value of Bre-X’s gold prospects?

The financial information would be an important part of the evidence that is firstly used by the investigators. The financial results and the operation characteristics provide the investors with firsthand information and data that would be crucial in determining the value of the firm’s gold prospects. Both internal and external audit information would be necessary for the investigations to determine the gold prospects (Usman & Shah 2015). Primarily, looking at the exterior information mainly from the external auditor can provide the investigators with a place to begin their investigations. Further, the economic characteristics would be another important area of concern as the company seemed to have made shady dealing before the scandal emerged.

Question 2: How were the gold industry and Canadian stock markets affected by this fraud?

The stock and gold markets were both affected by the fraudulent activities of Bre-X Mining Company negatively. The price of gold in the country and entire world went down because of fabricated large-scale deposits which later turned to be a hoax. The share price of other organisations was negatively affected by the issue with some groups even experiencing their downfall as shareholders were buying only share from Bre-X company as they seemed promising and a good return on investment.

Question 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?

The main common element present in the two case studies are fraud mainly occurs when an organisation is at its peak. Secondly, when the organisation has the backing and trust of the investors. Similarly, the fraudulent activities of the two agencies were mainly instigated by people with higher positions in the firm (Lou, & Wang 2011). Moreover, the frauds in the two cases involved fabrication of information in influencing the decision making by the investors and shareholders.

Question 4: What were some of the perpetrators’ motivations to commit fraud?

The primary motivators for executives to commit fraud include greed and moral decay. Other motivators include raising the price of the company’s share so that those owning shares in the firm can sell them at a higher price making more money.

Solution to preventing fraud

Corporate frauds are common in many companies, and they influence negatively to both the owner of the companies and the shareholders when they arise. However, it is vital for the government and the firms to set up strict measures and standards that will prevent such happening of frauds that may affect the shareholders who invest in companies (Usman & Shah 2015). Similarly, it is the work of the stakeholders to ensure that the rights of the shareholders are respected and protected by the corporation from the dishonest individuals. The following are some of the measures that the companies can adopt to prevent similar fraud from happening shortly.

Hire experts

The company should employ experts such as the certified fraud examiners (CFE) who will be in charge of establishing and examining antifraud procedures and policies to ensure that the information been given to the investors is correct and not misleading. This professional can provide extensive services to the company such as necessary consultations and forensic analysis. These would keep track of all the activities happening in the enterprise by establishing the corrupt employees and the management team (Usman & Shah 2015). Clear organisational structures and written policies would prevent fraud and open lines of communication between the employees of the company and the investors.

Implement internal controls

These are programs and plans which are executed by a company to safeguard company’s assets as well as deter and detect theft and frauds. Segregation of obligations is a vital element of internal control that can lessen the jeopardy of fraud from occurring. However, internal control programs should be regularly revised and monitored to ensure they are current and efficient by the company’s activities (Usman & Shah 2015). If a company does not have proper fraud prevention program, then it should make a choice of employing a professional who has an in-depth experience in that area.

Setting moral standards

Companies should put in place ethical standards whose aim is to monitor employees while undertaking their duties and ensure that they do not engage in illegal activities while in the workplace. Employees behaviours should be taken into consideration while performing their duties to ensure that they do not engage in activities that illegal and against the company’s rules and regulations (Usman & Shah 2015). However, they should build customer loyalty to attract more investor in the enterprise who will transform the corporate into the next level. The executive management should be in the first line in giving an example to the rest employees and monitor to ensure that the standards are followed strictly.

Forced vacations

Forced vacations help the top management to monitor the activities of an employee in a firm. It is only through unexpected vacation that the certified team can adequate access the employee’s work and identify activities that may be questionable about the employee (Usman & Shah 2015). These will reduce fraud activities by a wide margin as an employee will work genuinely fearing to be sucked.

References

Henry, E., & Robinson, T. R. (2015). Chapter 1. Financial Statement Analysis: An Introduction. CFA Institute Investment Books, 2015(2), 1-35.

Lou, Y. I., & Wang, M. L. (2011). Fraud risk factor of the fraud triangle assessing the likelihood of fraudulent financial reporting. Journal of Business & Economics Research (JBER), 7(2).

Usman, A. K., & Shah, M. H. (2015). Critical success factors for preventing e-banking fraud. The Journal of Internet Banking and Commerce, 2013.