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Building on earlier findings on the role of budget institutions on fiscal performance, this article models and measures the effectiveness of AAAs in emerging economies. It develops a quantitative index to evaluate their performance and gauge their impact on financial governance and fiscal oversight in ten Latin American countries. Resorting to agency theory and comparative political economy, it analyses the contribution of AAAs to mitigate the twin challenges of legislative delegation and government oversight in public financial management.

The article tests the explanatory power of alternative institutional arrangements for external auditing of government finances and delves into the political economy of government auditing and budget oversight to explain the root causes of institutional dysfunctions. It weighs the influence of two sets of factors underpinning organizational performance: internal governance factors linked to the choice of institutional arrangements for government auditing and fiscal control (the institutional design hypothesis); and external governance factors linked to the broader governance context in which AAAs are embedded, in particular the dynamics of executive-legislative relations, the nature of the political system, and the culture of the public administration (the political economy hypothesis).

Using a principal-agent analytical framework, it contrasts the institutional trajectories of AAAs in Argentina, Brazil and Chile, which illustrate the three main models for organizing the external audit function in modern states. The Argentine National Audit Office (Auditoria General de la Nación, AGN) is a legislative body with a collegiate decision-making structure. The Brazilian Federal Tribunal of Accounts (Tribunal de Contas da União, TCU) is a quasi-judicial body with a collegiate decision-making structure similar to that of courts of justice. The Chilean Office of the Comptroller General (Contraloría General de la República, CGR) is an independent state agency headed by a single auditor-general with ample powers and prerogatives.

The article argues that, while the choice of institutional arrangements for government auditing matters, political economy factors condition the effectiveness of AAAs. Ultimately, external, rather than internal governance factors have greater explanatory power on agency performance. Dysfunctions in government auditing and fiscal control are systemic, rather than agency specific and linked to the choice of institutional design. What matters most, therefore, is the quality of the AAA’s insertion in the system of fiscal control and financial oversight. In particular, the agency’s links with its main principal, the legislature, are critical to explain its effectiveness (or lack thereof). Strengthening external oversight of public finances necessarily entails revisiting the governance of the budget and enhancing the systems of checks and balances governing the budget process. Thus, AAAs face political constraints inasmuch as technical constraints.

The article also investigates the political economy of AAAs’ reform. It reveals the limits of institutional design and constitutional engineering for improving the performance of external auditing of government finances. The cases of Argentina, Brazil and Chile illustrate three main pathways to reform (or lack thereof). While the Argentine case provides an example of failure of reform, the Chilean case offers an example of the failure to reform. While the Brazilian case illustrates the promises of gradual reform based on successive adjustments, the Argentine case warns against the dangers of radical reform based on the institutional transplant of exogenous models. The article thus demonstrates that standard reform strategies based on institutional transplant of exogenous models and changes in the agency’s internal governance are likely to fail. External factors, such as the functioning of the national system of fiscal control, the functioning of the cycle of legislative accountability and the balance of budgetary powers, matter greatly. Ultimately, effective reform must be couched in the country’s trajectory of institutional change and the nature of the country’s public financial management system.

These findings have important implications for policymakers seeking to strengthen financial governance and reduce fiduciary risk, as well as for donor governments supporting these efforts


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