Governing the quango: An auditing and cheating model of quasi-governmental authorities

The New Public Management has a paramount implication for the delegation of authority to implement public policy, namely, that efficient delegations are designed according to the substance of the task to be performed. In other words, the government must be able to choose the best agent to carry out a particular task, which implies that the set of agents must not be confined to actors and departments within the bureaucracy. This flexibility of form creates the incentives behind the quango, and increases the importance of ex ante design for the legislature to avoid misuse of public funds. It also has the potential to increase ex post enforcement activity by the government. This article examines ex ante design from the perspective of auditing, presenting a formal model of the construction of auditing procedures as a response to expectations of the misuse of funds. By creating requirements such as the requisite submission of annual plans, reports, and accounts, governments attempt to create a compliance-inducing scheme much like that present in tax enforcement. The theoretical model generates empirical predictions that are statistically examined using data on public bodies in the Netherlands created between 1946 and 1993. Empirical results demonstrate strong support for the theory.