We suggest three archetypical models for financial monitoring of aid in developing countries. The models are focused on:
(i) Control, (ii) Coordination, and, (iii) Change.
Foreign aid programs can run into billions of dollars and are implemented in some of the world’s most difficult places amidst armed conflicts and catastrophes. This is high risk. Monitoring can reduce those risks if implemented correctly.
Providing development aid comes with high risks. Traditionally the focus has been on the chances that the program may not meet its objectives; i.e the program may not be effective, it may not poorly designed, not needed, not cost-effective, sustainable, or it may not be successfully implemented due to a range of factors. Increasingly there is also much attention to a different area of the risk universe; that the aid money may get defrauded, corrupted or simply stolen, whether it is due to incompetence or criminal activity.
As a response to this, development aid is provided to developing countries along with increasingly stringent requirements for financial safeguarding of the funds. This paper discusses a particular model for control that is increasing in significance: The use of external monitoring by auditors or specialized “Monitoring Agents”.
This is the “gold standard”. It is complicated, but it can also be very effective. Primarily it is effective to achieve control, but also to improve program implementation in general, and perhaps most importantly, to build system capacity with the recipient organizations. The challenges in setting up such arrangements are considerable. There are a number of dilemmas and complications for design and implementation.
Use of monitoring arrangements come in three distinct types:
Control: This is the basic model. An external agent is tasked with providing Information and control of whether the spending is for intended purposes.
Coordinate: This builds upon the control model. Its monitoring+. The monitoring is directly linked to program implementation, i.e advice from the monitoring agent is used prior to making disbursement and not just as a post-fact audit.
This is about leveraging the monitoring to build systemic change. There are important advantages of this, including a unique access to information and insight on the ground. There are also several dilemmas and the arrangement needs to be well managed.
Significant financial safeguard measures are justified as precautions in environments when the risk of misappropriated foreign aid is unacceptable high. A monitoring arrangement can reduce the risk if implemented properly.
Over time, there has been a proliferation of financial monitoring arrangements. Financial Monitoring Agents are now applied globally across many different programs, countries and institutions. This development is tied to several different types of aid programs; i.e direct funding to a countries budget, specific sectors, or for investments in infrastructure and social development in remote places.
The approaches vary in scope and methodology: from traditional “audit” style to intense capacity building initiatives. Some of the techniques are similar to those of an audit, applying similar standards and reporting practices. Other models are more like “auditor on steroids” whereby the work is much about program implementation or capacity building. In some arrangements, there is real-time monitoring while for others there is only post-event document reviews.
A significant impact of the proliferation of financial monitoring is its contribution to the sustained mobilization of large funds to countries and crisises that otherwise wouldn’t receive much foreign aid due to the fiduciary risks. Monitoring has made it possible to convince the international community that it is prudent to provide financial support; directly to governments whose internal systems are in shambles, or to finance infrastructure or activities of organizations in post-conflict situations where the control environments is very difficult.
Many monitored programs still fail spectacularly. Corruption and fraud is uncovered. In a number of high profile programs has the monitoring failed to detect fraud and error, and subsequently impacted performance of the programs, its legitimacy and ability to mobilize aid funds.
There are many important considerations for managers of monitoring arrangements. If balanced well, it is feasible to reduce the risks meaningfully, achieve impact, and deliver aid successfully to the places where it is needed most.
Ian worked with the big audit firms for a long time before joining Abyrint in the very early days. He is a certified accountant, has worked with KPMG and PWC, corporate and public sphere, around the world. For years he also led PwC teams in financial monitoring of the Afghan Government on behalf of the World Bank.