Private Fitness LLC is a springboard case that can be used as the basis oI a discussion oI

management's need Ior inIormation. It serves the same purpose Ior Part 2 oI the book that the
Kim Fuller case did Ior Part 1.
Approach
This case uses a small business as its setting so that students can visualize the business's
activities, and so questions oI generally accepted accounting principles will be essentially
irrelevant. In Iact, a shiIt the student needs to make as he/she begins Part 2 oI the book is to think
oI accounting primarily in terms oI its useIulness to a company's management, rather than in
terms oI reporting to shareholders and other outside parties. Because oI the diIIering Iocus oI
Part 1 oI the book, particularly the later chapters, some students will Iorget that they are dealing
here with inIormation Ior an apparently unsophisticated manager to help her run a small
business, and not data Ior a NYSE company.
This case is compelling both because students understand the businessIitness-trainingand
because there is a real problem to discuss. A trusted employee was both stealing cash and, by not
recording all sales, diverting some revenues to herselI.
Discussion oI this simple case helps students think about both the records needed to run the
business and the challenges managers Iace in making sure the inIormation put into the records is
recorded accurately (i.e., the challenges Iaced in maintaining an eIIective internal control
system). The case illustrates a common problem Iaced in many small businesseslack oI
overlapping controls, or in this case, what auditors call 'separation oI duties.
Discussion
To run this simple privately-held business, Rosemary does not have to be concerned with
generally accepted accounting principles. She does need to keep records that will allow the easy
preparation oI a tax return. But her primary concern should be in maintaining systems records
that allow her to manage...

hat should Rosemary do?
InIorm employees about internal security measures, e.g., surveillance and inventory checks, and
the likelihood and consequences oI being caught stealing. Many employees steal because they
think they can easily get away with it. Limit employee access to the building to the hours that
they are scheduled to work.
(1) Cash Control
Provide a receipt Ior every transaction. Encourage customers to expect a receipt by posting signs
at each register.
Put one employee in charge oI setting up cash drawers. Have another double-check the cash
count. Make each employee responsible Ior his/her own cash drawer. Issue one cash drawer per
on-duty employee. No other employee should at any time (during lunch, breaks, etc.) be allowed
to open or use another's cash drawer. At the end oI each shiIt each cash drawer should be
balanced by the employee and double-checked by another.
Require that the cash register drawer be closed aIter each transaction. Never leave a register
unlocked when not attended. And never leave the register key with a register. IdentiIy each over-
ring and under-ring. Managers should sign oII all voids and over-rings. Check signatures against
those on Iile.
Limit the amount oI accumulated cash in any register. Use a drop-saIe. Check cash-to-sale ratios.
These, along with unusually Irequent reIund transactions, can indicate employee theIt.
Keep tendered bills on the register until the transaction is concluded. Short-change artists
Irequently use large bills to pay

Conduct only one transaction at a time. Do not be intimidated into rushing. Check Ior counterIeit
currency. The look oI the paper and its "Ieel" are usually the most obvious signs. A common
counterIeiting practice is to "cut corners" oII large bills and aIIix them to small-denomination
bills. Inexpensive devices are available to aid detection oI counterIeit bills.
(2) Get your employees involved - OIIer rewards to employees who report theIt. Ask your staII
Ior their suggestions on how to eliminate theIt.
(3) Employee background Checks - Contact previous employers to Iind out iI this person has a
theIt problem beIore you hire. hen employees are not screened properly, you spend more time
and money training new employees to replace dishonest ones.
(4) Survey Cards:
Give your customers a short survey card to complete or place one on your web site Ior customers
to Iill out. OIIer recognition and rewards to employees who consistently provide exceptional
customer service.

(5) Video Surveillance:
OIten just installing cameras will cause employees to think twice beIore stealing. But in order Ior
them to be eIIective, you need to let your employees know you check these by oIIering them
Ieedback (Positive or Negative) based on their job perIormance by viewing these videos with
them.
(6) Cash in Sheets:
Have employees do a cash in sheet Ior every shiIt. This would be a control sheet where the
employee would take the gross sales, subtract paid outs, adjustments and credit sales (adjusted
gross sales). Count down the cash drawer, leaving the change Iund amount (usually $100.00).
Subtract this Irom Irom the adjusted gross sales and this will give you your over and shorts. This
should always be within 90 cents. Too much money could mean a customer was short-changed
and being short money could mean a customer was given too much change or possibly employee
theIt. Have them place the money in an envelope, date and sign it and place it in the saIe.
Keeping the cash register drawers low in cash also helps to deter would be robbers. hen they
see only a small amount oI cash in the register, they are less likely to take the risk oI getting
caught and going to jail.
(7) Do a product inventory and usage sheet
Conduct inventories oIten and at irregular intervals. Also make routine spot checks. Inspect
records oI purchases and sales at the beginning and end oI each shiIt. DeIine individual
employee responsibilities Ior inventory control. This establishes a climate oI accountability
Post signs to indicate areas that are open to the public and those that are Ior employees only.
Install locks on all doors to interior work areas to control public and employee access. Doors to
storage and supply rooms, and individual oIIices should be locked to limit access
(8) Trash Control
Keep trash dumpsters inside during business hours. Check bins at random times Ior pilIered
goods that might have been placed in them Ior pick-up aIter the trash is taken out. Use clear
plastic trash bags. Inspect contents Ior pilIered goods. Keep lids oI outside trash dumpsters
locked during non-business hours. II practical, keep the lids locked whenever the dumpsters are
not being Iilled or emptied. Have employees work in pairs in emptying trash. Or have diIIerent
employees empty the trash Irom day to day.
II You Suspect TheIt
Despite your best eIIorts, dishonest employees can Iind ways to steal. II you suspect theIt, call
your local police department. Don't play detective and try to solve the crime. And do not jump to
unwarranted conclusions. A Ialse