Middle Earth Bank Case Study

1. Introduction

The Middle Earth Bank was situated in Hobbiton, and it used a flexible management principle that allowed an employee to be appointed for more than one position simultaneously. As any other bank, its aim was to make profit off buying shares on one market and immediately trading on the other market and other related financial activities.

The bank had as its head trader, Bilbo, who was simultaneously the floor manager for the Bank's trading on the Stock Exchange, and the unit's head of settlement operations. Such positions made it possible for him to perform his unauthorized trading and get away with it, as he was in position to settle him own trades, among many other things.

The bank began declining as Bilbo started putting his personal financial interests

Discovery

Bilbo continued with his obscure trading up until 1 April 2000, when he left Hobbiton to fly to Erebor. The bank’s auditors finally discovered the fraud around the same time that the Bank's chairman, Gandalf, received a confession note from him. After the collapse, several observers, including Bilbo himself, placed much of the blame on the bank's own deficient internal control and risk management practices. A number of people raised concerns over Bilbo's activities but were ignored.

2.2 Damages

His activities had generated losses totalling 827 million clams, twice the bank's available trading capital. The collapse cost another 100 million clams. Employees around the world did not receive their bonuses. Middle Earth Bank was declared insolvent on 21 April 2000, and appointed administrators began managing the finances of Middle Earth Bank Group and its subsidiaries. Another bank purchased Middle Earth Bank in 2000 for the nominal sum of 1 clam and incorporated is into itself, assuming all of Middle Earth Bank’s liabilities.

3. Management problems

According to Nieman and Bennett (2014), the collapse of the Middle Earth Bank followed a series of management problems such as the