Accounting due diligence in Paraguay: what to review before buying or investing in a company

1. First define what “reviewing the company” means

The term due diligence is used for very different types of work.

An accounting and financial review may examine:

• financial statements;
• accounting records;
• taxes;
• banks and cash;
• receivables;
• suppliers and other liabilities;
• assets;
• transactions with shareholders and related parties;
• quality and consistency of documentation.

But it should not be presented as a substitute for:

• legal review of title or ownership;
• legal review of litigation and contracts;
• specialist employment-law compliance review;
• environmental or sector-specific permits;
• technical condition of property, machinery or systems;
• commercial market analysis.

Before requesting documents, define which decision the review needs to support.

Buying 100% of a company does not raise exactly the same questions as investing as a minority shareholder or buying only selected assets.

2. Existence, ownership and control

The first question sounds obvious: is the company being offered exactly the company that exists in the records?

In Paraguay, MEF administers registers of persons and legal structures and of beneficial owners. SIARA also provides public information on entities that have made communications to the administrative registers.

Depending on the case, the review should compare:

• legal name;
• RUC;
• type of entity;
• representatives;
• shareholders or partners;
• beneficial owners;
• corporate communications;
• material amendments;
• incorporation documents.

The objective is not to collect names out of curiosity. It is to verify that the ownership and control described by the seller match the documentation and that material changes can be traced.

If there is a discrepancy between the company agreement, a later filing and what the seller says today, that discrepancy should be resolved before valuing the ownership interest.

3. Tax position: more than asking for a certificate

DNIT allows taxpayers to obtain certificates and confirmations related to tax compliance.

That document is useful, but it answers a specific question: the taxpayer’s status against the conditions for issuing that certificate.

A broader due diligence may review:

• RUC and active obligations;
• returns filed;
• balances and debts;
• payments;
• withholding taxes;
• financial statements provided to the tax administration where applicable;
• differences between tax returns and accounting;
• known contingencies;
• unusual transactions.

A company can be formally up to date and still have matters an investor needs to understand: debatable accounting treatments, expenses with insufficient support, inventory differences, shareholder loans or a tax position that depends on an interpretation.

The certificate is not useless. It simply does not replace the rest of the work.

4. From the balance sheet back to the evidence

A financial statement summarizes. The review tries to work back from the summary to the evidence.

Cash and banks

Compare accounting balances with statements and reconciliations.

Ask about:

• accounts not reflected in the accounting records;
• transfers without explanation;
• old outstanding cheques;
• deposits that do not correspond to sales;
• transactions with shareholders.

Accounts receivable

It is not enough to know how much “customers owe.”

It is useful to know:

• ageing;
• concentration;
• overdue balances;
• later credit notes;
• disputes;
• collections received after closing.

A receivable of G. 500 million is not worth the same if it was collected a week later as if it has been overdue for two years.

Suppliers and liabilities

Compare the accounting balance with supporting documents, contracts, statements and later payments.

Look for obligations recorded late or appearing in the bank but not in the supplier listing.

Inventory

If the business depends on stock, the accounting figure should be capable of connection to physical inventory and a reasonable valuation method.

Old, damaged or unsellable inventory can physically exist without having the value suggested by the balance sheet.

Fixed assets

For vehicles, machinery, property and other tangible assets ask:

• do they exist?
• do they actually belong to the company?
• are they recorded?
• is there debt or a security interest associated with them?
• is the accounting value still useful for understanding the business?

Legal title to certain assets should be reviewed by the appropriate professional.

5. Revenue quality matters as much as the total

Two businesses can invoice exactly the same amount and have very different risks.

Review:

Concentration

What percentage depends on the three or five largest customers?

If a single customer accounts for half of sales, the buyer is not acquiring a revenue stream as diversified as the annual total may suggest.

Recurrence

Separate recurring revenue from exceptional sales.

An extraordinary transaction just before the business is sold should not be confused with the normal pace of operations.

Related parties

Identify sales to companies related to shareholders or administrators.

They are not necessarily problematic, but it is worth knowing whether the terms resemble market conditions and whether the relationship will continue after the transaction.

Collection

Invoicing is not the same as collecting cash.

Compare sales, receivables and bank receipts to understand how much revenue actually becomes cash.

6. Liabilities that may not appear in the first conversation

The seller can provide a correct list and still have obligations that do not appear there.

Ask about:

• taxes;
• suppliers;
• bank loans;
• shareholder loans;
• employment and social-security obligations;
• leases and long-term contracts;
• guarantees given;
• customer advances;
• litigation or claims, to be referred for legal review;
• purchase commitments;
• related-party transactions.

The useful question is not only “How much does the company owe?” but “How do we know the list is complete?”

One basic technique is to review payments made after the balance-sheet date. If significant payments appear for obligations that were not recorded, it is necessary to understand why.

7. Employees: reconcile people, payroll and obligations

Where there are employees, it is useful to compare different sources:

• internal payroll;
• accounting records;
• bank payments;
• IPS documentation;
• relevant employment documentation;
• provisions and outstanding balances.

An accounting review can identify differences. Determining their legal consequences belongs, where necessary, to specialist employment-law review.

8. Shareholders and related parties

Transactions with owners deserve attention because they can mix the economics of the business with personal finances.

Review:

• shareholder loans to the company;
• loans or advances from the company to shareholders;
• personal expenses paid by the company;
• shareholder-owned property or vehicles used by the business;
• related companies invoicing each other;
• guarantees;
• old balances with no movement.

The objective is not to assume they are wrong. It is to know what they are and whether they will continue after the investment.

9. Signals that deserve a second question

Signal	Why it matters	What to request next
Sales rise sharply but cash does not	Receivables may be increasing strongly or collection may be weakening	Customer ageing and subsequent collections
Bank balances do not reconcile to accounting	Transactions may be omitted or recorded incorrectly	Complete statements and reconciliations
Many balances with shareholders	Financing, withdrawals and personal expenses may be mixed together	Movement-by-movement detail and support
Inventory grows faster than sales	Stock may be slow-moving, overvalued or physically different from the records	Inventory ageing and physical count
Supplier balances remain outstanding for a long time	There may be disputes or accounts that were not properly cleared	Supplier statements and subsequent payments
Margin changes sharply before the sale	It may be real or reflect classification changes/non-recurring transactions	Monthly sales and costs plus explanation
Documentation for important assets is missing	The balance sheet may not demonstrate ownership or existence	Titles, invoices, registers and physical verification
Certificates are in order but requested returns or supporting documents are missing	The certificate does not answer every due-diligence question	Returns, statements and underlying documentation

A signal is not an accusation. It is an instruction about where to review more closely.

10. Initial document request list

A reasonable request can be organized into blocks.

Corporate

• incorporation documents and amendments;
• shareholder/partner and representation documents;
• relevant corporate communications;
• available beneficial-owner information.

Tax

• RUC;
• tax-compliance certificate or confirmation;
• principal returns for the period under review;
• relevant tax-account statements;
• open communications or audits, if any.

Accounting

• financial statements;
• trial balance;
• ledgers or detail of material accounts;
• important accounting policies or treatments;
• reconciliations.

Banks

• list of accounts;
• statements;
• reconciliations;
• loans and credit facilities.

Revenue

• sales by customer;
• receivables;
• ageing;
• key contracts where relevant;
• collections after closing.

Liabilities

• suppliers;
• loans;
• accounts payable;
• obligations to shareholders;
• subsequent payments.

Assets

• inventory;
• fixed assets;
• ownership documents;
• associated debt or security interests.

Personnel

• payroll;
• payments;
• employment and social-security documentation necessary for the agreed scope.

The final list depends on the business. A service company and an importer should not receive exactly the same checklist.

11. How findings should end

A useful due diligence does not need to classify everything as “good” or “bad.”

A more useful structure is:

Confirmed
The information was reconciled to sufficient evidence for the agreed scope.

Difference explained
A discrepancy existed and an evidence-based explanation was obtained.

Outstanding
Information is still missing to close the question.

Potential risk or adjustment
The difference could affect price, warranties, conditions or the decision.

Specialist review
The matter should be referred to a lawyer, notary, employment specialist, technical expert or another professional.

That allows the investor to decide what to do with the information instead of receiving a pile of documents.