Steven L. Jager, C.P.A.

15250 Ventura Blvd, Suite 1100, Sherman Oaks, CA 91403  * (818)501-5797  Fax: (818)501-8560

 June 4, 2002

R.U. Nutts
805 N. Sheik St.
Beverly Hills, CA 90210

RE:       Engagement for set-up and maintenance of computerized accounting system, and periodic financial reporting.

Dear Mr. Nutts:

 Based on our prior discussions, and from our last meeting on May 31, I have prepared the enclosed engagement letter for your review and signature.  You will notice that in describing the services to be provided, I have specified that “compiled” financial statements will be presented on an annual basis, instead of the “audited” statements that you initially requested.

 As you know, the “audit” is the highest level of service provided. The objective of the audit is for the CPA to perform procedures which will enable him to provide reasonable assurance (the “option”) that the financial statements reported on fairly present the financial position and the results of operations in conformity with generally accepted accounting principles applied on a consistent basis.

The next level of service is the “review”.  A review provides limited assurance that no material modifications are required for the financial statements to conform with generally accepted accounting principles.  It is substantially less in scope than an audit and no opinion can be expressed.

 Finally, a “compilation” is the basic level of service. A compilation involves presenting, in the form of financial statements, information that is the representation of the management and/or owners of the financial entity.  No assurance is provided, and no opinion is expressed.

 To be sure, every client would desire the “benefits” that only an audit can provide.  However, audits are not necessary the best value (they are always more expensive than reviews or compilations).  In fact, some of these “benefits” may only be illusory. Consequently, it is important to consider other factors in the decision – especially in your particular situation.

1.      Fee Considerations:  As mentioned parenthetically above, audits can be very expensive because     a considerably greater amount of work must be done than when performing a review or compilation. Moreover, a surcharge would have to be imposed over and above my standard hourly fees to cover the additional costs and expertise brought to bear on this  engagement.  My estimate of the total additional “surcharge” would be in the range of $6,000 to $10,000 annually.

2.      Expected Use:       It is important to consider who the reader/user of the financial statements will be and “buy” accordingly.  If your use is intended to be primarily internal, then clearly there is little reason to have audited statements. On the other hand, if the statements will be consistently given to your bank or to some other creditor, then let us consider a higher level. Most banks today will accept a REVIEWED statement instead of an audit, and many will even accept a COMPILED personal financial statement if accompanied by the personal tax return.

With regard to the federal or state taxing authorities, it will make no difference at all whether you have audited, reviewed or compiled financial statements.  There is no correlation between the underlying accountant’s report and the incidence of a tax examination, the ease with which a tax examination is survived, and the results achieved.

Moreover, it is very important to note that by performing a financial audit of your personal books and records, I would, of course, be required to do so in accordance with generally accepted accounting principles, which for personal financial statements, are often quite different than tax reporting principles.

 In practical terms, you must look at the cost/benefit relationship in making this decision.  My recommendation is that we contract for a “compilation” of your personal “general ledger” as well as for your corporation.  It is certainly possible to “upgrade” to a “review”, if your bank or some other creditor requests it. Moreover, although I believe that a “compilation” is in your best interest, the ultimate decision is yours.

 Finally, the engagement letter enclosed calls for the monthly funding towards aggregate annual fees of $450 per month.  We have discussed that this type of arrangement does NOT mean a fixed fee of any sort. All of my fees are based on time charges at standard  hourly rates plus out-of-pocket costs. Periodically (at least every six months or more often) we will compare the calculated time charges and costs to amounts paid or :funded”, and we will settle the difference by way of an additional cash payment then owed to me, or possibly, in a credit to you for the subsequent period. Should you decide to contract for a “review”, the monthly funding amount will be $600; for an “audit” it will be $1000.

 In the meantime, my office has already begun the initial stages of creating your personal general ledger on the Peachtree software system, according to the arrangements that we discussed on May 31, in anticipation that we will go forward with the engagement as set forth in the engagement letter.

 As always, should you have any questions, please do not hesitate to call me.

                                                                        Best personal regards,

                                                                        STEVEN L. JAGER, CPA

                                                                        AN ACCOUNTANCY CORPORATION

 SLJ/lmw

Enclosure

cc.Eric Shark, Esq.