I.

Statement of the problem:

What internal control systems should Rosemary establish to protect her business assets
and mitigate risks in the future?

II.

Identification of Critical Issues

Rosemary went into business to increase her standard of living by capitalizing on her
reputation and knowledge in the growing tness eld and to have more time to spend
with her two young children.
To open the club, Rosemary had to use almost all her personal savings, plus she had to
take out a bank loan. She spent $150K to renovate the facility of her club and acquire
the necessary fitness equipment.
Kate Hoffman, one of the hired instructors as well as Rosemarys long time friend, was
primarily tasked to do the marketing, facility up keep, scheduling of appointments and
records keeping of the business
She was paid a salary plus commission based on gross revenues as compared to the
other instructors who were paid on commission basis only.
During normal business hours when Kate was teaching a class, one of the other
instructors, or sometimes a part-time clerical employee, was asked to staff the front desk
in return for an hourly wage
Rosemary was still in the process of building the volume necessary to operate at a profit
but Kates marketing efforts were proving effective as the number of clients were growing
giving Rosemary hopes that by the end of business year, they would be earning profits.
Rosemary gradually realized that Kate was stealing from the club as cash amounts had
disappeared while one client was reportedly writing personal checks directly to Kate
rather than turning it over to the business, which Kate admitted eventually.
Rosemary had two major problems: The theft of cash and the unrecorded revenue which
are internal control issues that she has to address, and secondly, the issue of assuming
the managerial role herself as she has significant family responsibilities to attend to.

III.

Discussion and Analysis

The business is plagued with a couple of control system issues causing problems to further
escalate. This is due to the fact that Rosemary and her personnel dont have any business
background and experience. Below are the identified issues based on the case critical
factors:
1. No proper recording and monitoring of revenues and expenditures
Main source of revenue is from the number of clients attending the classes and private
workouts. The problem is, the business doesnt have an automated system or at least a
proper manual recording system to monitor the number of attendees and their fees, thus,
resulting to Kate taking advantage of this major loophole. Same goes with the tracking of its
daily and monthly expenses which includes differences in its payroll. These expenses need
to be recorded and tracked accurately in order to come up with reliable financial report for
forecasting and budgeting.

2. No scheduling system for instructors and employees.

With a limited number of personnel, schedule of staffing and classes are not clearly
defined. With a challenge like this, capacity utilization is not properly maximized causing
an additional expense in the form of a part time clerical employee filling in for Kates
desk work.
3. Rosemarys family related concerns
Main reason why Rosemary went into business is for her to spend more time with her
family meaning she can never guarantee full control of business operations. This should
be a big obstacle for her to go through as most businesses need owners to go full time
especially on its formative stages.
4. Funds are limited
After almost exhausting all of her savings to put the business up, it appears that
Rosemary has limited funds to invest on added personnel and equipment for better
monitoring and tracking of business activities. The decision for her to remedy the issues
on hand would also depend on available resources including funds and how profitable
the business is at the moment.

IV.

Alternative course of action

1. Hire a competent manager to oversee the daily operations and assign Kate Hoffman as
permanent fitness instructor or fire her if she wont take the offer.
The new manager will basically assume Kates role and responsibilities in marketing,
personnel handling, records keeping and facilities monitoring but with more expertise
and better efficiency. The new manager must be at least experienced in the role and
should have worked previously in a related field. The manager will have to be paid with a
fixed salary and commissions based on business revenues.
Advantages:
a) Handling of business operations will be more focused and concentrated which would
translate to better efficiency
b) Staffing will be properly addressed together with scheduling of classes
c) Fitness facilities are better maintained
d) Better marketing efforts as strategies will be implemented accordingly with more
traction.
e) Policies will be enforced without biases since manager doesnt have any attachment
to the personnel
Disadvantages:
a) Hiring a new manager might be costly considering limited funds and might be time
consuming
b) Strained friendship between Kate and Rosemary
c) The risk of new manager not delivering and meeting expectations

2. Rosemary will go full time on managing the business and keeping accounting records.
Rosemary will have to sacrifice family time in order to get her hands full on the business.
This might be a short term solution or long one depending on how the business will grow
once she takes over into the business operations.
Advantages:
a) Reduces the potential for employee fraud and thefts.
b) Her active managerial role will likely portray a positive image to customers about her
seriousness and commitment to the business
c) Rosemary will gain more knowledge in running her business
d) No additional cost for hiring manager
Disadvantages:
a) She will significantly reduce her time spent on family
b) Work life balance will be disrupted and pressure from both might not be easy to
overcome
c) Defeats her main purpose in putting up the business

V.

Recommendations
Based on the alternative courses of actions above and thorough analysis of its pros and
cons, I recommend that Rosemary implement alternative number 1. Although costly at first,
getting a competent manager in the long run could increase revenues and therefore
accumulate profits for the business. Implementation of the chosen alternative should also
deal with the internal controls needed within the business. Below tackles in detail on how
these controls should be addressed in relation with hiring a new manager and relegating or
firing Kate.
Actions control Hiring of a new manager and assigning Kate to different role is itself
considered as an action control as it accomplishes separation of duties. However, it should
not end on this note as Rosemary, together with the new manager, can implement more.
One viable plan to take after hiring a new manager and sorting everything out is the
investment of a cctv camera, locked cash box and usage of receipts which could prevent
theft and fraudulent activities as well as foster better records monitoring.
Results Control The new manager should implement a rewards system for each
personnel when it comes to client referrals and the number of handled classes. This should
solve two issues faced by the organization. Employees will be motivated to pitch for more
more clients which should aid on the marketing side of the business and second, this should
keep them away from illegally taking advantage of business assets for monetary gains.
Personnel Control One of the responsibilities of the new manager is managing its people
which entails giving the right support system for development of skills and addressing of
behavioral problems. The new manager should also be responsible in the selection of new
personnel that should fit with business culture and policies. He should also be the one to
delegate task to tenured employees like Kate so as to give them direction and growth.