Research Highlights

Introduction

One of the interesting developments in public sector auditing in the last decades has been the emergence of “follow-the-money” audit mandates to close a gap in the chain of accountability for public funds that are finding their way in a multitude of pockets. Follow-the-money audits have gradually gained traction, as more and more jurisdictions around the world are adopting the mandate in one form or another to perform such audits.

This article provides an overview of what follow-the-money audit mandates entail and why they have become necessary. It also explores some variations in how the mandate is articulated and put into practice. Finally, it presents some examples of how this mandate has been implemented by different audit institutions and highlights some differences between follow-the-money audits and regular performance audits.

What Is a Follow-the-Money Audit?

Follow-the-money audits are part of the trend of the expanding role of auditors general since the 1970s. Simply put, they extend the traditional audit mandates beyond the financial statements and organizational boundaries of government organizations. Through follow-the-money audits, auditors can scrutinize the use of public funds provided to other jurisdictions, individuals, contractors, private sector corporations, and non-profit organizations (Bini, 2012).

However, while all follow-the-money audits serve a similar purpose, they do not all follow a single model. As shown in Table 1, they can vary according to a number of parameters, and certain conditions, such as financial thresholds, may restrict their reach and extent.

Table 1 – Examples of Follow-the-Money Mandates

It is worth clarifying that follow-the-money audits do not constitute a type of audit as would be defined in audit standards, unlike financial, compliance, or performance audits. In fact, a follow-the-money audit can be any of these types of audits. Nor is the term “follow-the-money” even used in most audit legislation. However, the literature on the topic, and audit offices themselves, use this term to communicate about the legislative audit mandate and the audits that flow from it.

Appendix A of this article synthesizes the variations of follow-the-money mandates among federal and provincial jurisdictions in Canada.

Why Have Follow-the-Money Audits Become Necessary?

The need to track government funds and the creation of follow-the-money audit mandates has followed a number of developments in public sector governance. In recent history, governments have increasingly sought partnerships and innovative delivery mechanisms, and these have changed the way many government programs, activities, and services are designed and delivered. For example, in the State of Victoria in Australia, nearly 40% of the growing prisoner population is housed in three privately managed prisons. These prisons were privately designed, financed, and built in the space of two years, ending the state’s monopoly on prisons (Sands, O’Neill, and Hodge, 2019).

One important risk with these types of arrangements is that private sector providers may decide to hide behind confidentiality agreements or claims of commercial sensitivities and refuse to make key performance information public. This could lead to a paradoxical situation where small government agencies have to bear a heavy burden of accountability for relatively minor programs while large-scale projects managed by private firms escape the brunt of scrutiny (Hodges and Fawcett, 2014).

When follow-the-money mandates were debated, a counterargument was made that existing audit mandates were sufficient to hold government accountable for any public funds spent and therefore extending the powers of audit offices was unnecessary. For instance, Grant Hehir, then-secretary of the Department of Treasury and Finance of the State of Victoria, told a 2010 parliamentary inquiry into the Audit Act 1994 that he had some qualms regarding the necessity of follow-the-dollar powers (as they are known in Australia). He argued before the Public Accounts and Estimates Committee that, for example, issues related to contract management were already within the purview of the Auditor-General. If a contract manager could not be assured that the contract has been delivered effectively, then the contract was not written in a way that allows that to happen and needed to be fixed (Parliament of Victoria, 2010).

Ultimately, in many jurisdictions, the consensus that has prevailed is that alternative delivery mechanisms, involving various forms of partnerships, were eroding the capacity of legislative audit offices to do their job. As was argued when this issue was debated in the Victoria and Queensland parliaments in Australia, it was not about extending audit powers but restoring them. These powers were needed to ensure that the drift of expenditures outside the perimeters of government entities would not prevent audit offices and the legislatures they serve from ensuring that public funds are managed with due diligence (Queensland Parliament, 2011; Doyle et al., 2014).

Finally, an important caveat must be mentioned. The exercise of audit powers, like any powers conferred by a law, are subject to judicial reviews and the resulting jurisprudence (CCAF, 1996). They can be interpreted in a number of ways with respect to who and what can be audited (Supreme Court of Canada, 1989). Follow-the-money mandates are no different and, being relatively recent, will certainly undergo clarifications of their practical application over time.

Table 2 describes some of the new partnerships and innovative delivery mechanisms used by governments and how they may make accountability for public expenditures more challenging from an audit perspective. The table provides examples of situations in which organizations outside the realm of government machinery could receive public funds, play key roles in providing services and building infrastructures, and yet escape the scrutiny of government auditors and parliamentary oversight.

Table 2 – New Delivery Mechanisms and Their Accountability Implications

What Should You Take Into Account When Conducting a Follow-the-Money Audit?

There are not many differences between “regular” performance audits and follow-the-money audits in terms of how they are conducted. However, because the auditees are outside the perimeter of the classical public sector, there are a number of factors that auditors should consider at each phase of the audit process.

Planning

• The auditees will tend to lack familiarity with being audited by public sector auditors. They may not understand the audit mandate or may argue that the audit office does not have the powers to conduct the audit. Clear communications should be established with the auditees at the outset to ensure that they understand their rights and responsibilities.
• In the case of P3 agreements, there is sometimes an audit clause that is inserted at the outset in anticipation of the need to provide the access required by auditors to perform their work (CAAF, 2015). In such cases, even an audit office without formal follow-the-money powers can use this clause to conduct audit work and provide accountability on the use of public funds.

Examination

• Access and evidence collection may be more challenging with private sector auditees who may not accept or recognize the authority of auditors and may put roadblocks in their way or only cooperate reluctantly. The auditors, in these instances, may need to be more assertive and insistent. In the worst cases, an escalation involving senior management and/or legal counsel may be appropriate.

Reporting

• Clearance and agreement on wording of the audit report may be more arduous than usual. Involvement of audit office senior management and legal counsel may be necessary.

Oversight

• When the report goes beyond the boundaries of the government, the extent to which a public accounts committee can hold an external body accountable could be problematic and may require that this situation be handled delicately.

Examples of Follow-The-Money Audits

Our research has not identified a large number of audits done using the follow-the-money authorities. There are several reasons for this.

First, although they are widely recognized as being necessary and useful, the power to conduct follow-the-money audits is an extension of what are already extensive mandates to audit government organizations that happen to be among the largest financial and institutional entities in their respective countries or jurisdictions. In many instances, audit offices are already using the bulk of their resources to cover the “traditional” government organizations and activities; resources available for follow-the-money audits may therefore be scarce.

Furthermore, many of the entities that can be covered by a follow-the-money mandate are not necessarily large enough or represent sufficient risk to warrant an audit.

Finally, as some audit offices told us, follow-the-money audits are often the result of allegations by third parties and are not published because they turn into an investigation of fraud or wrongdoing, which can fall under a different legal umbrella (courts of justice or police authorities).

Table 3 provides an overview of a few follow-the-money audits that were conducted in Canada and Australia.

Table 3 – Examples of Published Follow-the-Money Audits

Conclusion

As the public sector has continued to evolve by using an ever-expanding array of alternative delivery mechanisms, involving other jurisdictions, individuals, contractors, private sector corporations and non-profit organizations, audit offices have acquired mandates that allow them to assess how these services are performed and managed even when they are squarely located outside the traditional government organizations. This has helped to reduce the risks presented by loopholes in the accountability for the expenditures of public funds that citizens and their representatives now expect.

Far from resulting in extensive intrusions in areas where public sector auditors were previously excluded, follow-the-money audits have been used selectively and strategically and have contributed to reducing the risks to accountability in situations where Parliament and citizens could have been blindsided after public funds were disbursed to third parties.