Windfall federal grants and local government corruption

Abstract

Although preventing and detecting public sector corruption is critically important to citizens and regulators, surprisingly little US accounting research addresses it. Our study investigates whether federal grant shocks (deemed “windfalls”) increase occurrences of local public official corruption, and whether local, state and federal audit oversight and an active press help ameliorate that relationship. Using a unique hand-collected dataset of local public corruption constructed from court filings, we find that grant windfalls are associated with significantly more public corruption charges filed. With respect to local audit oversight, questioned costs and audit findings exacerbate windfall-corruption relations, while modified opinions and material weaknesses have no significant effect. State oversight results suggest a greater percentage of state fraud auditors on staff, as well as the appointment of a State Auditor who is a Certified Fraud Auditor, weakens the windfall-corruption relationship. The appointment of a new federal oversight agency coupled with a windfall has a deterrence effect, suggesting that a newly appointed oversight agency has “fresh eyes” and monitors the local government more closely. Results also demonstrate a robust local news media helps reduce windfall-corruption relations. Additional analyses suggest that results are stronger when the lead criminal charge is specifically related to federal grant programs. Overall, we contribute to extant literature by exploring accounting-related aspects of local public corruption that may help inform federal regulators interested in strengthening the Single Audit process.

Keywords: Governmental Accounting, Federal Grants, Fraud Auditing, Material Weakness, Press Transparency, public corruption