External Financial Evaluation of SLS, El Salvador

Background

In 2003 a comprehensive organisational evaluation of SLS was done. The evaluation revealed a need for a more thorough evaluation of the area of financial management.

Purpose/objective

To evaluate the current financial situation of SLS, as well as recommend measures to improve the areas under examination, and additionally, to verify the reasonability of the balance sheets and accounting records.

Special requirements:
-To verify compliance, on the part of the institution, with tax and labor laws as well as other requirements applicable to the activities of SLS.
-To evaluate the reliability of the internal control system and its functionality.
-To examine support documentation for cash disbursements and the reasonability of global expenditures.
-To analyze the collection of reported current and past due balances. Investigate reasons for renewal of documents.
-To verify the physical existence and ownership of the assets. Certify that the more important acquisitions have been registered in the name of the organization.
-To exam the procedure for the acquisition of assets and inventory goods.
-To exam insurance policies that protect the assets of the institution.
-To review other matters considered to be of importance to SLS operations.

Methodology

-Meetings with SLS personnel.
-Evaluation of the internal control system.
-Risk management evaluation.
-Samples of the accounting documents/support documentation.
-Quality assurance of the procedures/documents.

Key findings

SLS had deficiencies in the processing of financial information, in internal control system and SLS, also, has failed to comply with some legal obligations, especially those related to the retention of income tax for the professional and technical services, the retention of social security quotas end expenses that are not supported with legal documentation.

1. Financial Information
We observed the following deficiencies in the processing of financial information:
A. Delays in the ownership registration of the San Lorenzo land plot, acquired in June 2001, and which has yet to be recorded as an asset of the institution.
B. Omission of the appraisal of the main land plot on which the headquarters of the SLS is currently located, as well as a record of a mortgage obligation related to said asset.
C. Bank balances shown on the financial statements, totalling USD3,941inactive for a number of months, and for which no evidence of ownership was available to us.
D. Account Receivable with Créditos Fe y Servicios, in the amount of USD45, 341, shown on the financial statements, of which only USD2, 000 is considered collectible.
E. Accounts Payable in the amount of USD142 651 shown on the financial statements, of which we could not find evidence of the source.
F. Repeated use of the bank reconciliation's as a tool to verify income receipts, due to the weaknesses of the internal control system, a basic element in the recording and reporting of income receipts.
G. General lack of formality in the preparation of the financial statements, whose information does not agree with the official figures prepared by the NCA concerning execution of the various projects.

2. The Internal Control System
We found important deficiencies in the internal control system, summarized as follows:
A. Inadequate procedures for the receipt of income and its application to the auxiliary records of accounts receivable. No auxiliary income correlation records are kept to allow for verification of cash received during the reporting period and there is no verification of the accuracy of the data after processing. The data reported on the auxiliary does not reflect the discounts applied on the payrolls.
B. Deficiencies in the procedural formality of loans to employees. The contracts do not agree with the figures of the accounting department. The accounting department is not informed in a timely and adequate manner by upper levels, of changes occurring in regards to agreed upon conditions with the credit beneficiaries. Information is changed on magnetic media by verbal instruction, without supporting documentation.
C. The accountant is the only person privy to the operational structure of the data processing system. No back-ups have been created to support accounting information files outside of the terminal where they are managed, allowing for risk of total loss of the records.
D. Deficiencies in the control of advances made to employees, and the corresponding retentions recorded on the payroll and the record of modifications to payroll data, and which are carried out by verbal instruction, with no supporting documentation.
E. Deficiencies in the control of expenses and use of assigned assets belonging to the entity.

3. Compliance with Laws
SLS has failed to comply with some legal obligations, such as the retention of income tax for professional and technical services rendered, retentions of the social security quotas, based on amounts lower than actual wages, and expenses that are not supported with legal documentation, all of which leads us to believe that SLS is not in compliance with laws and applicable requirements.

Recommendations

SLS has to improve its internal control systems, through the implementation of some mechanisms and instruments to register all the financial movements. Besides that, SLS has to legalize its organisation. Concretized in a long list of specific recommendations.