Responsibility of Administrators Regarding Audit Findings in El Salvador

Among the various responsibilities concerning the governance of the entity (executives of the board of directors, owner, manager, among others) is management aimed at creating value for the shareholder, as they expect a return on their investment.

The shareholder would expect to see the value of their investment in various financial indicators, including the profit earned in a year; figures that are reflected in the financial reports prepared by the accounting departments of companies.

Now, these profit figures are the result of a consolidation of detailed operations of purchases, sales, collections, payments, and so forth. This also includes figures for “expenses” and “income” that do not correspond to operations that were executed, but to judgments and estimates that accounting policies, which govern globally and are mandatory in El Salvador, require to be applied.

These operations translated into numbers in financial reports must be reasonably presented and unbiased so that the investor has confidence that the value of their investment is accurately represented in them.

However, the Commercial Code itself requires these figures to be certified by a subject matter professional (an auditor) who, through a written report addressed to the highest authority of the company, aims to increase that level of confidence in the reported figures in the financial statements and ensure that these are reasonably presented under the recording, valuation, presentation, and disclosure policies that the company uses when preparing such financial statements.

If the auditor detects inconsistencies and biases in the preparation of those financial reports (because the recording and valuation policy, for example, has not been properly applied, or because there has been abuse in the application of judgments or estimates to increase or decrease values of income, expenses, assets, and liabilities), the auditor must communicate, objectively and independently through a letter to management, such conditions so that the Board of Directors of the company proceeds to evaluate what has been reported and decide the next steps.

The Board of Directors, as responsible for the governance of the entity, will be the one to ventilate or justify before the highest authority (the owner, or the shareholders’ assembly) what is relevant in the face of such findings.

The advisable course of action for such cases, in which findings have been communicated by the auditor, is:

    1. Correct the discrepancies if they are notably evident or technical.
    2. Discuss them with the auditor if they are attributed to the improper application of judgments and estimates.

In terms of a tax audit, the findings reported by the auditor have an even greater prevalence, since being known to the Tax Administration (as they are reflected in the tax opinion and report sent through the web platform of the Ministry of Finance), it can initiate a determinative or punitive process based on such findings, with the company itself incurring liability to the treasury that may result in a depletion of assets through the complementary payment of taxes or payment of penalties.

On the other hand, the board of directors will be jointly responsible for such findings, as defined by articles 43, 230, 233, and 234 of the Tax Code.

Finally, in terms of preventing money laundering and asset laundering, audit findings can trigger alerts that will help strengthen the prevention system and avoid incurring conditions that could be classified as complicity or co-authorship in money laundering and asset laundering offenses, implicating all those responsible for the governance of the entity in joint civil liability, as established in Art. 15 of the Anti-Money Laundering and Asset Act and Arts. 38 and 118 of the Penal Code.

Hence the utmost importance for the preparers of financial information and the highest authority of companies to:

    • Understand the technical criteria with which they are being audited/evaluated.
    • Attend permanent and updated specialized training on applicable technical criteria.
    • Respond to findings by correcting what has been observed or discussing them with their auditor.
    • Hire professional advisors in the field of audit services and other related services, to accompany them during the process of preparing financial statements, and during the recording and valuation of operations.

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