EVALUATION OF VALUE FOR MONEY AUDIT, AS A TOOL FOR FRAUD CONTROL IN THE PUBLIC SECTOR (A STUDY OF POWER HOLDING COMPANY OF NIGERIA)

CHAPTER ONE: INTRODUCTION

1.1 Background of the Study

Value for Money (VFM) audit, also known as performance audit, is a specialized form of auditing that goes beyond traditional financial and compliance audits to evaluate whether an organization has acquired, utilized, and managed its resources in an economical, efficient, and effective manner. These three elements—economy, efficiency, and effectiveness—constitute the “three E’s” of VFM auditing. Economy means acquiring resources of appropriate quality at the lowest possible cost (spending less). Efficiency means obtaining the maximum output from the resources used (spending well). Effectiveness means achieving the intended objectives and outcomes (spending wisely). VFM audit is particularly important in the public sector, where organizations are entrusted with public funds and are expected to deliver services to citizens, not to maximize profits (INTOSAI, 2019; Premchand, 2019).

Traditional financial audits focus on whether financial statements are accurate and whether transactions comply with laws and regulations (regularity audit). While these are essential, they do not address whether public funds were used wisely. A government entity could be fully compliant with all financial regulations—every payment properly authorized, every receipt recorded—yet still waste public money by paying inflated prices (poor economy), producing output at unnecessarily high cost (poor efficiency), or failing to achieve intended outcomes (poor effectiveness). VFM audit fills this gap by examining these qualitative dimensions of public spending. For citizens and taxpayers, VFM audit provides assurance that their money is not only accounted for but also used well (Mellett, 2019; Chan, 2018).

Fraud control encompasses the policies, procedures, and activities designed to prevent, detect, and respond to fraudulent activities within an organization. Fraud in the public sector can take many forms: procurement fraud (kickbacks, inflated invoices, bid rigging), payroll fraud (ghost workers, inflated salaries), asset misappropriation (theft of equipment, supplies, or cash), corruption (bribery, extortion), and financial statement fraud (misrepresentation of financial position). Traditional fraud control mechanisms include internal controls, segregation of duties, authorization requirements, and financial audits. However, these mechanisms often focus on the “how” of spending (was it authorized?) rather than the “why” and “what” (was it necessary? was value obtained?). VFM audit can complement traditional fraud control by identifying the conditions that enable fraud: poor economy (paying inflated prices may indicate kickbacks), poor efficiency (wasteful processes may hide skimming), and poor effectiveness (failure to achieve outcomes may indicate diversion of resources) (INTOSAI, 2019; Okafor and Udeh, 2020).

The Power Holding Company of Nigeria (PHCN) was, for many years, the government-owned monopoly responsible for the generation, transmission, and distribution of electricity in Nigeria. The company was originally established as the Electricity Corporation of Nigeria (ECN) in 1951, later merged with the Niger Dams Authority (NDA) to form the National Electric Power Authority (NEPA) in 1972. NEPA was later rebranded as PHCN in 2005 as part of a reform process. PHCN was characterized by chronic inefficiency, massive revenue losses (due to poor collection and theft), high operational costs, poor service delivery (frequent blackouts), and widespread corruption and fraud. The company was eventually unbundled and privatized in 2013, with the successor companies (Generating Companies-GenCos and Distribution Companies-Disco’s) sold to private investors. The PHCN era provides a rich case study for examining the potential value of VFM audit as a tool for fraud control (CBN, 2010; Adebayo and Oyedokun, 2019).

The scale of fraud and inefficiency at PHCN was staggering. Reports from various sources documented: massive electricity theft (illegal connections, meter bypassing, underbilling), procurement fraud (overpriced contracts, phantom contracts, kickbacks), payroll fraud (ghost workers, inflated salaries), fuel theft (diesel for generators stolen and resold), and systemic corruption (bribes for connections, disconnections, or billing adjustments). The financial losses ran into billions of Naira annually. Traditional financial audits, while identifying some irregularities, failed to address the underlying systemic issues. VFM audit, with its focus on economy, efficiency, and effectiveness, could potentially have provided management and oversight bodies with deeper insights into the root causes of fraud and inefficiency, enabling more effective interventions (Nwankwo and Okeke, 2019; Eze and Nwafor, 2020).

The concept of economy in VFM audit relates to fraud control in several ways. Economy focuses on minimizing the cost of resources acquired while ensuring appropriate quality. When an organization pays significantly more than market price for goods or services (poor economy), it may indicate procurement fraud (kickbacks to officials, collusion with suppliers). VFM audit can identify patterns of overpricing that might escape traditional financial audit. For PHCN, VFM audit of procurement activities could have revealed whether transformer purchases, cable procurements, and contractor services were obtained at competitive prices or whether inflated prices suggested fraud. By identifying these patterns, VFM audit aids fraud control by highlighting red flags that require investigation (INTOSAI, 2019; Mellett, 2019).

Efficiency focuses on maximizing output from given inputs (or minimizing inputs for given outputs). When an organization has poor efficiency—high costs per unit of output, low productivity, excessive waste—it may indicate fraud (e.g., employees stealing supplies, production inefficiencies hiding skimming) or simply poor management. For PHCN, efficiency indicators would include: cost per megawatt-hour generated, transmission losses, collection efficiency (percentage of billed revenue collected), and customer-to-staff ratios. Abnormally high transmission losses, for example, could indicate electricity theft (a form of fraud) or technical inefficiencies. VFM audit can help distinguish between fraud and inefficiency and recommend appropriate responses (Premchand, 2019; Chan, 2018).

Effectiveness focuses on whether the organization is achieving its intended objectives and outcomes. When an organization fails to achieve its objectives (poor effectiveness), it may be due to fraud (resources diverted, goals sabotaged) or other factors (poor planning, external constraints). For PHCN, effectiveness indicators would include: reliability of electricity supply (hours of power per day), customer satisfaction, access to electricity (percentage of population connected), and financial sustainability. Chronic poor effectiveness at PHCN—frequent blackouts, low customer satisfaction—coexisted with massive fraud. VFM audit could have assessed the extent to which fraud contributed to poor effectiveness and recommended fraud control measures as part of performance improvement (Okafor and Udeh, 2021; INTOSAI, 2019).

The relationship between VFM audit and fraud control is both direct and indirect. Directly, VFM audit can detect indicators of fraud (red flags) that traditional audits might miss. For example, a VFM audit might identify that a particular procurement consistently pays above-market prices (poor economy), which could indicate kickbacks. Indirectly, VFM audit contributes to fraud prevention by: (a) creating a deterrent effect (potential fraudsters know that VFM auditors are looking at economy, efficiency, and effectiveness, not just compliance), (b) strengthening internal controls (VFM recommendations often lead to improved processes that reduce opportunities for fraud), (c) enhancing accountability (VFM findings provide evidence for oversight bodies), and (d) promoting a culture of value and integrity (VFM audit signals that management cares about how resources are used, not just that they are accounted for). For PHCN, the absence of effective VFM audit may have contributed to the persistence of fraud and inefficiency (Pickett, 2018; Sawyer and Dittenhofer, 2018).

The mandate for VFM audit in the Nigerian public sector is derived from several sources. The Constitution of the Federal Republic of Nigeria (1999, as amended) empowers the Auditor-General of the Federation to audit the accounts of all federal government entities, including PHCN. The Audit Act provides for both regularity (compliance) and performance (VFM) audits. The Financial Reporting Council of Nigeria (FRCN) has issued standards for public sector auditing that incorporate VFM concepts. The International Standards of Supreme Audit Institutions (ISSAI) issued by INTOSAI provide detailed guidance on conducting VFM audits. Despite this legal and professional framework, VFM audit in Nigeria has historically been underutilized, with most audit resources devoted to financial and compliance audits. PHCN, like many public entities, may not have been subject to rigorous VFM audit (OAuGF, 2020; FRCN, 2014).

The challenges of conducting VFM audit in the public sector, particularly in an entity like PHCN, are significant. These include: (a) difficulty in measuring effectiveness (defining and quantifying outcomes), (b) lack of reliable performance data (PHCN’s information systems were notoriously weak), (c) resistance from management (who may see VFM audit as threatening), (d) lack of auditor skills (VFM audit requires different skills than financial audit, including performance measurement, data analysis, and evaluation methodology), (e) cost and time (VFM audits are generally more resource-intensive than financial audits), and (f) risk of politicization (findings of poor performance can be politically sensitive). For PHCN, these challenges may have limited the extent and quality of VFM audit conducted (INTOSAI, 2019; Eze and Nwafor, 2019).

The privatization of PHCN and its replacement by successor companies changed the audit landscape. The successor companies (GenCos and DisCos) are now private entities, subject to private sector auditing standards. However, the pre-privatization period (the PHCN era) involved massive public funds (government investments, subsidies, loans, and customer payments). Understanding the failures of that era, and the potential role that VFM audit could have played in controlling fraud, holds lessons for the public sector more broadly. Many other public sector entities in Nigeria face similar risks of fraud and inefficiency. Strengthening VFM audit across the public sector could help prevent future PHCN-like failures (Adebayo and Oyedokun, 2020; Okafor and Udeh, 2021).

The role of the Auditor-General and the Public Accounts Committee in VFM audit is critical. The Auditor-General conducts VFM audits and reports findings to the National Assembly. The Public Accounts Committee reviews these reports, summons accounting officers to explain findings, and recommends sanctions. However, in the PHCN era, this oversight system was weak. Audit reports were often delayed, poorly disseminated, or ignored. The Public Accounts Committee lacked technical expertise to review VFM findings effectively. Sanctions for poor performance or fraud were rarely imposed. For VFM audit to be an effective tool for fraud control, the broader accountability system must function. PHCN represents a case where the system largely failed (Oyo-Ita, 2019; Ogbeifun, 2019).

Despite these challenges, there are significant prospects for VFM audit as a tool for fraud control in the Nigerian public sector. These include: (a) growing international and professional support for VFM audit (INTOSAI, IIA, professional bodies), (b) improved data availability and analytical tools (digitalization, data analytics, geographic information systems), (c) increased public demand for accountability (citizen pressure, civil society advocacy), (d) public financial management reforms (GIFMIS, TSA, IPPIS) that improve data quality and auditability, (e) strengthening of anti-corruption agencies (EFCC, ICPC) that can act on VFM findings, and (f) lessons from other countries that have successfully implemented VFM audit. For PHCN’s successor companies and other public entities, these prospects offer hope for improved fraud control (Chan, 2018; Okafor and Udeh, 2020).

The evaluation of VFM audit as a tool for fraud control requires a systematic approach. This study will examine: (a) the extent to which VFM audits were conducted at PHCN, (b) the findings of any VFM audits regarding economy, efficiency, and effectiveness, (c) the relationship between VFM findings and identified fraud cases, (d) the factors that enabled or hindered VFM audit effectiveness, and (e) the lessons for future VFM audit implementation. By focusing on PHCN, a worst-case example of public sector inefficiency and fraud, the study can provide powerful evidence of the potential value (and limitations) of VFM audit (Yin, 2018; Creswell and Creswell, 2018).

Finally, this study is timely given ongoing public financial management reforms in Nigeria and continued concerns about fraud and inefficiency in public sector entities. The privatization of PHCN has not eliminated fraud in the electricity sector; successor companies face their own challenges. Moreover, other public entities—water boards, transportation authorities, health institutions, educational bodies—face similar risks. If VFM audit can be demonstrated to be an effective tool for fraud control, this study will provide evidence to support its wider adoption. If challenges are identified, the study can propose practical solutions. In an era of scarce public resources and high citizen expectations, ensuring that every Naira is used economically, efficiently, and effectively is not just good management—it is a democratic imperative (Premchand, 2019; Mellett, 2019).

1.2 Statement of the Problem

The Power Holding Company of Nigeria (PHCN), during its years of public ownership, was notorious for inefficiency, waste, and widespread fraud. Despite the existence of traditional financial audits, internal controls, and oversight bodies, the company experienced massive financial losses due to electricity theft, procurement fraud, payroll fraud, and systemic corruption. The scale of fraud and inefficiency suggests that existing fraud control mechanisms were inadequate. One potential tool that was underutilized or ineffective at PHCN was Value for Money (VFM) audit—an audit approach that evaluates whether resources are used economically, efficiently, and effectively. It is unclear whether VFM audits were conducted at PHCN, what findings they produced, whether those findings identified fraud red flags, and what impact VFM audit had (if any) on fraud control. The absence of effective VFM audit may have allowed fraud to flourish and inefficiency to persist. Conversely, if VFM audits were conducted but ignored or ineffective, then the problem lies not in the tool but in its implementation or the broader accountability environment. Therefore, this study is motivated to evaluate Value for Money audit as a tool for fraud control in the public sector, using PHCN as a case study, and to identify lessons for strengthening VFM audit in other public sector entities.

1.3 Aim of the Study

The aim of this study is to evaluate Value for Money (VFM) audit as a tool for fraud control in the public sector, using the Power Holding Company of Nigeria (PHCN) as a case study.

1.4 Objectives of the Study

The specific objectives of this study are to:

1. Examine the concept and framework of Value for Money (VFM) audit in the Nigerian public sector.
2. Assess whether VFM audits were conducted at PHCN and, if so, their scope, methodology, and findings.
3. Evaluate the relationship between VFM audit findings (regarding economy, efficiency, effectiveness) and identified fraud cases at PHCN.
4. Identify the factors that facilitated or hindered the effectiveness of VFM audit as a fraud control tool at PHCN.
5. Propose recommendations for strengthening VFM audit as a fraud control tool in the Nigerian public sector.

1.5 Research Questions

The following research questions guide this study:

1. What is the concept and framework of Value for Money (VFM) audit in the Nigerian public sector?
2. Were VFM audits conducted at PHCN, and if so, what were their scope, methodology, and findings?
3. What is the relationship between VFM audit findings (regarding economy, efficiency, effectiveness) and identified fraud cases at PHCN?
4. What factors facilitated or hindered the effectiveness of VFM audit as a fraud control tool at PHCN?
5. What recommendations can be made to strengthen VFM audit as a fraud control tool in the Nigerian public sector?

1.6 Research Hypotheses

The following hypotheses are formulated in null (H₀) and alternative (H₁) forms:

Hypothesis One

• H₀: Value for Money audit findings have no significant relationship with the detection of fraud indicators at PHCN.
• H₁: Value for Money audit findings have a significant relationship with the detection of fraud indicators at PHCN.

Hypothesis Two

• H₀: Poor economy (inflated procurement prices) is not significantly associated with procurement fraud at PHCN.
• H₁: Poor economy (inflated procurement prices) is significantly associated with procurement fraud at PHCN.

Hypothesis Three

• H₀: Poor efficiency (high operational costs, low productivity) does not significantly correlate with the incidence of fraud at PHCN.
• H₁: Poor efficiency (high operational costs, low productivity) significantly correlates with the incidence of fraud at PHCN.

Hypothesis Four

• H₀: Weak implementation of VFM audit recommendations (rather than the absence of VFM audit itself) is not the primary reason for ineffective fraud control at PHCN.
• H₁: Weak implementation of VFM audit recommendations (rather than the absence of VFM audit itself) is the primary reason for ineffective fraud control at PHCN.

1.7 Significance of the Study

This study is significant for several stakeholders. First, the Office of the Auditor-General of the Federation will benefit from insights into the effectiveness (or ineffectiveness) of VFM audit as a fraud control tool, informing audit planning, methodology, and resource allocation. Second, public sector entities (ministries, departments, agencies, and state-owned enterprises) will gain understanding of how VFM audit can complement traditional financial audit in detecting and preventing fraud, supporting stronger internal control systems. Third, anti-corruption agencies (EFCC, ICPC) will benefit from understanding how VFM audit findings can provide evidence and leads for fraud investigations. Fourth, the National Assembly (particularly the Public Accounts Committee) will gain evidence on the role of VFM audit in oversight, informing hearings, questioning, and follow-up actions. Fifth, the Federal Ministry of Finance, Budget and National Planning will benefit from insights into public financial management reforms that could strengthen VFM audit capacity. Sixth, international development partners (World Bank, IMF, DFID/UKAID) will gain insights into the challenges of implementing VFM audit in Nigeria, informing technical assistance programs. Seventh, professional bodies (ICAN, ANAN, IIA Nigeria) will find value in the study’s identification of VFM audit challenges and best practices, informing training, CPD programs, and professional guidance. Eighth, academics and researchers in public sector auditing, public financial management, and anti-corruption studies will benefit from the study’s contribution to the literature on VFM audit in the Nigerian context. Ninth, civil society organizations focused on governance, transparency, and accountability will gain evidence that can support advocacy for stronger VFM audit across the public sector. Finally, Nigerian citizens and taxpayers will benefit indirectly as stronger VFM audit leads to better use of public funds, reduced fraud and waste, and improved public services.

1.8 Scope of the Study

This study focuses on the evaluation of Value for Money (VFM) audit as a tool for fraud control in the public sector, using the Power Holding Company of Nigeria (PHCN) as a case study. Geographically, the research is limited to PHCN’s national operations, with emphasis on its headquarters and major operational units in Nigeria. PHCN was the government-owned electric power monopoly that operated until its unbundling and privatization in 2013. Content-wise, the study examines the following areas: the concept and framework of VFM audit (economy, efficiency, effectiveness); the extent and quality of VFM audits conducted at PHCN; the relationship between VFM findings and fraud indicators; fraud types (procurement fraud, electricity theft, payroll fraud, corruption); factors affecting VFM audit effectiveness (auditor skills, data availability, management support, political interference, follow-up); and recommendations for strengthening VFM audit. The study targets former PHCN management, internal auditors, external auditors (Auditor-General’s office), anti-corruption agency officials, and industry experts. The time frame for data collection is the cross-sectional period of 2023–2024, though retrospective data from the PHCN era (pre-2013) will be collected. The study does not cover the successor companies (GenCos, DisCos) after privatization, except as they relate to the PHCN legacy, nor does it cover VFM audit in other public sector entities (except for comparative context).

1.9 Definition of Terms

Value for Money (VFM) Audit (Performance Audit): A specialized form of auditing that evaluates whether an organization has acquired, utilized, and managed its resources in an economical, efficient, and effective manner (the “three E’s”).

Economy: Acquiring resources of appropriate quality at the lowest possible cost; spending less (e.g., paying market prices, avoiding waste).

Efficiency: Obtaining the maximum output from the resources used (or minimizing inputs for given outputs); spending well (e.g., high productivity, low unit costs).

Effectiveness: Achieving the intended objectives and outcomes; spending wisely (e.g., achieving goals, delivering services, satisfying citizens).

Fraud Control: The policies, procedures, and activities designed to prevent, detect, and respond to fraudulent activities within an organization.

Procurement Fraud: Fraud related to the acquisition of goods and services, including kickbacks, inflated invoices, bid rigging, phantom contracts, and supply of substandard goods.

Electricity Theft: Unauthorized abstraction of electricity through illegal connections, meter bypassing, tampering, or underbilling.

Ghost Workers: Fictitious employees on a payroll whose salaries are collected fraudulently.

Power Holding Company of Nigeria (PHCN): The former government-owned monopoly responsible for electricity generation, transmission, and distribution in Nigeria, operating until its unbundling and privatization in 2013.

Red Flag: An indicator or warning sign that suggests the possibility of fraud, inefficiency, or other irregularities, warranting further investigation.

Compliance Audit (Regularity Audit): An audit that focuses on whether financial transactions comply with laws, regulations, budgets, and internal policies.

Performance Indicator: A measurable value that demonstrates how effectively an organization is achieving its objectives (e.g., collection efficiency, transmission losses, customer satisfaction).

Benchmarking: The process of comparing an organization’s performance (e.g., costs, productivity) against industry standards, best practices, or peer organizations to identify areas for improvement.

Economy, Efficiency, and Effectiveness (3 E’s): The three dimensions of VFM audit, evaluating whether resources are used at low cost (economy), with high productivity (efficiency), and to achieve objectives (effectiveness).

INTOSAI: The International Organization of Supreme Audit Institutions, which issues International Standards of Supreme Audit Institutions (ISSAI) including standards for VFM audit.

Public Accounts Committee (PAC): A committee of the National Assembly responsible for reviewing audit reports, summoning accounting officers, and recommending sanctions for financial irregularities.

Unbundling: The process of breaking up a vertically integrated monopoly (like PHCN) into separate entities for generation, transmission, and distribution, often as a prelude to privatization.

Privatization: The transfer of ownership of a state-owned enterprise to private investors.

Transmission Losses: Electricity lost during transmission from generating stations to distribution points, due to technical factors (line resistance) or non-technical factors (theft, meter inaccuracies).

Collection Efficiency: The ratio of actual revenue collected to the amount billed; an indicator of billing accuracy, collection effectiveness, and theft.

Phantom Contract: A contract for goods or services that are never delivered, used to fraudulently divert public funds.

Kickback: A secret payment made to a public official in return for favorable treatment in a procurement or contracting process.

CHAPTER TWO: LITERATURE REVIEW

2.1 Conceptual Framework

A conceptual framework is a structural representation of the key concepts or variables in a study and the hypothesized relationships among them. It serves as the analytical lens through which the researcher organizes the study, selects appropriate methodology, and interprets findings. In this study, the conceptual framework is built around three primary constructs: Value for Money (VFM) Audit (the independent variable), Fraud Control (the dependent variable), and the Public Sector Context (the moderating environment). Additionally, the framework identifies the specific dimensions of each construct and the mediating mechanisms through which VFM audit affects fraud control (Miles, Huberman, and Saldaña, 2020).

The independent variable, Value for Money (VFM) Audit, refers to the systematic evaluation of whether an organization has acquired, utilized, and managed its resources in an economical, efficient, and effective manner. For the purpose of this study, VFM audit is conceptualized along three primary dimensions—the “three E’s”—each with specific sub-dimensions: (a) Economy (minimizing the cost of resources while maintaining appropriate quality, including procurement price analysis, cost comparisons, and avoidance of waste), (b) Efficiency (maximizing output from given inputs, including productivity analysis, cost per unit analysis, process optimization, and resource utilization), and (c) Effectiveness (achieving intended objectives and outcomes, including goal attainment, output quality, service delivery outcomes, and impact assessment). Each dimension provides different insights into organizational performance and different red flags for potential fraud (INTOSAI, 2019; Premchand, 2019).

The dependent variable, Fraud Control, refers to the policies, procedures, and activities designed to prevent, detect, and respond to fraudulent activities within an organization. For the purpose of this study, fraud control is conceptualized along three key stages: (a) fraud prevention (activities that deter fraud before it occurs, including controls, ethics training, background checks, and a strong control environment), (b) fraud detection (activities that identify fraud after it has occurred, including audits, whistleblower hotlines, data analytics, and reconciliations), and (c) fraud response (activities that address fraud after detection, including investigation, sanctions, recovery of assets, and corrective actions). A comprehensive fraud control system requires all three stages to function effectively. VFM audit can contribute to all three stages (KPMG, 2019; Wells, 2017).

The conceptual framework posits a positive relationship between the effective conduct of VFM audit and the effectiveness of fraud control, particularly in the detection and prevention stages. Specifically, VFM audit contributes to fraud control through the following mechanisms: (a) identification of red flags (poor economy—inflated prices—may indicate procurement fraud; poor efficiency—high costs—may indicate waste or skimming; poor effectiveness—failure to achieve outcomes—may indicate diversion of resources), (b) deterrence (the knowledge that VFM auditors are examining economy, efficiency, and effectiveness creates a deterrent effect on potential fraudsters), (c) control improvement (VFM audit recommendations often lead to strengthened controls that reduce opportunities for fraud), (d) accountability enhancement (VFM findings provide evidence for oversight bodies and anti-corruption agencies), and (e) cultural change (VFM audit signals that management cares about value, not just compliance, promoting an integrity culture). Conversely, when VFM audit is weak or absent, these benefits are not realized, and fraud may flourish undetected (INTOSAI, 2019; Mellett, 2019).

An important feature of this conceptual framework is the recognition of mediating mechanisms through which VFM audit affects fraud control. The framework identifies four primary mediating mechanisms: (a) economy-related fraud detection (VFM assessment of procurement prices can detect overpayments that may indicate kickbacks or collusion), (b) efficiency-related fraud detection (VFM assessment of resource utilization can detect anomalies that may indicate theft or waste), (c) effectiveness-related fraud detection (VFM assessment of outcomes can detect gaps that may indicate diversion of resources or goal sabotage), and (d) systemic control improvement (VFM recommendations lead to process changes that reduce fraud opportunities). Each mechanism operates through different channels and may be more or less important depending on the organizational context (Chan, 2018; Okafor and Udeh, 2020).

The framework also identifies several moderating variables that influence the strength of the relationship between VFM audit and fraud control. These include: (a) auditor competence (VFM audit requires specialized skills in performance measurement, data analysis, and evaluation methodology), (b) data availability and quality (VFM audit requires reliable, timely data on inputs, outputs, and outcomes), (c) management support (management must cooperate with VFM auditors and act on findings), (d) audit independence (auditors must be able to report findings without fear of retaliation), (e) follow-up mechanisms (recommendations must be tracked and implementation enforced), (f) political environment (political interference can suppress adverse findings), (g) legal framework (clear legal authority for VFM audit and enforcement of recommendations), and (h) oversight effectiveness (Public Accounts Committee and anti-corruption agencies must act on VFM findings). For PHCN, the specific values of these moderating variables will determine whether VFM audit was an effective fraud control tool (Eze and Nwafor, 2019; Adebayo and Oyedokun, 2020).

The framework also distinguishes between different types of fraud that VFM audit may help detect. These include: (a) procurement fraud (kickbacks, inflated invoices, phantom contracts, bid rigging), (b) asset misappropriation (theft of cash, inventory, equipment, or supplies), (c) payroll fraud (ghost workers, inflated salaries, unauthorized overtime), (d) revenue fraud (under billing, failure to collect, theft of receipts), and (e) corruption (bribery, extortion, favoritism). For each type of fraud, VFM audit can identify specific red flags: for procurement fraud, poor economy (above-market prices); for asset misappropriation, poor efficiency (high usage without corresponding output); for revenue fraud, poor effectiveness (collection rates below expected levels). The framework suggests that VFM audit is most effective at detecting fraud when it is designed to look for these specific red flags (Wells, 2017; KPMG, 2019).

The framework also recognizes the limitations of VFM audit as a fraud control tool. VFM audit is not designed to be a fraud audit; it does not use the same techniques (e.g., surprise counts, confirmations, transaction testing specifically for fraud). VFM audit may detect red flags that suggest fraud, but it does not prove fraud; further investigation is required. VFM audit may miss fraud if fraudsters are skilled at manipulating performance data (e.g., falsifying output measures) or if fraud does not manifest in economy, efficiency, or effectiveness indicators. Therefore, the framework suggests that VFM audit should be part of a broader fraud control strategy, not a substitute for other fraud control measures (INTOSAI, 2019; Pickett, 2018).

Methodologically, the conceptual framework guides the development of research instruments and analytical procedures. Interview guides and survey questionnaires are structured to capture each dimension of VFM audit (economy, efficiency, effectiveness), each stage of fraud control (prevention, detection, response), and each type of fraud (procurement, asset misappropriation, payroll, revenue, corruption). Questions probe specific examples from PHCN’s experience. The framework also guides the analysis of secondary data, including audit reports, fraud investigation reports, anti-corruption agency files, and PHCN performance data (Creswell and Creswell, 2018; Saunders, Lewis, and Thornhill, 2019).

Empirical studies that have employed similar conceptual frameworks in other public sector contexts provide validation for this approach. For example, studies on VFM audit in European public sectors found that VFM audit was effective at detecting procurement fraud red flags but less effective at detecting payroll fraud. Studies on VFM audit in African public sectors found that the effectiveness of VFM audit was heavily dependent on auditor competence and follow-up mechanisms. In Nigeria, research on public sector audit has found that VFM audit is underutilized, and when conducted, findings are often ignored. These findings support the relevance of the current framework for PHCN (Adebayo and Oyedokun, 2020; Eze and Nwafor, 2021; Okafor and Udeh, 2021).

The conceptual framework also addresses the unique characteristics of PHCN as a case study. As a large, complex, government-owned monopoly in a technically challenging industry (electricity), PHCN faced unique fraud and inefficiency challenges: electricity theft required technical knowledge to detect, procurement of specialized equipment (transformers, cables) offered opportunities for kickbacks, and the scale of operations (nationwide) made oversight difficult. The framework includes these industry-specific factors as moderating variables that affect the VFM audit-fraud control relationship (CBN, 2010; Nwankwo and Okeke, 2019).

Visually, the conceptual framework for this study can be represented as a diagram with “Value for Money Audit” (independent variable) at the left, with three boxes (economy, efficiency, effectiveness). An arrow points to “Fraud Control” (dependent variable) on the right, with three boxes (prevention, detection, response). Along the arrow are placed the four mediating mechanisms (economy-related fraud detection, efficiency-related fraud detection, effectiveness-related fraud detection, systemic control improvement). Above the arrow are placed the moderating variables (auditor competence, data availability, management support, audit independence, follow-up mechanisms, political environment, legal framework, oversight effectiveness). Below the diagram, a text box notes the limitations of VFM audit (detects red flags, not proof of fraud). This visual representation aids readers in quickly grasping the hypothesized relationships (Miles et al., 2020).

In summary, the conceptual framework of this study provides a clear, logical, and empirically grounded structure for evaluating Value for Money audit as a tool for fraud control in the public sector at PHCN. By disaggregating VFM audit into three dimensions (economy, efficiency, effectiveness), fraud control into three stages (prevention, detection, response), and by acknowledging the mediating mechanisms and moderating variables, the framework enhances the validity and reliability of the research findings. It also serves as a bridge between the theoretical foundations (discussed in section 2.2) and the empirical investigation (chapters three and four) (Creswell and Creswell, 2018).

2.2 Theoretical Framework

A theoretical framework is a collection of interrelated concepts, definitions, and propositions that present a systematic view of phenomena by specifying relationships among variables, with the purpose of explaining and predicting those phenomena. In this study, five major theories are adopted to explain the relationship between Value for Money (VFM) audit and fraud control in the public sector: the Fraud Triangle Theory, the Agency Theory, the Public Interest Theory, the Performance Management Theory, and the Deterrence Theory. These theories collectively provide a robust lens for understanding why VFM audit can detect fraud, why fraud occurs in the public sector, and what factors influence VFM audit effectiveness (Cressey, 1953; Jensen and Meckling, 1976; Posner and Sunstein, 2018; Behn, 2003; Becker, 1968).

2.2.1 Fraud Triangle Theory

The Fraud Triangle Theory, developed by criminologist Donald Cressey (1953), is one of the most widely used frameworks for understanding the causes of fraud. According to the theory, three conditions are necessary for fraud to occur: (a) pressure (or incentive) – a perceived need or motivation to commit fraud, such as financial difficulties, performance pressures, or lifestyle desires, (b) opportunity – the ability to commit fraud without being caught, resulting from weak internal controls, inadequate oversight, or access to assets, and (c) rationalization – the mental justification that makes fraud acceptable, such as “I deserve this,” “I’m only borrowing,” or “Everyone does it.” Fraud prevention and detection strategies must address all three elements (Cressey, 1953; Wolfe and Hermanson, 2004).

In the context of this study, the Fraud Triangle Theory explains why fraud flourished at PHCN and how VFM audit can address each element. Pressure: PHCN employees and managers faced low salaries, poor working conditions, and limited advancement opportunities, creating pressure to supplement income through fraud. Opportunity: PHCN had weak internal controls, poor record-keeping, inadequate oversight, and a culture of impunity, creating ample opportunity for fraud. Rationalization: Employees may have rationalized fraud as a “survival mechanism” or justified it because “the government is corrupt anyway.” VFM audit addresses fraud by: (a) identifying the conditions that create opportunity (poor economy may indicate weak procurement controls; poor efficiency may indicate weak operational controls; poor effectiveness may indicate weak performance monitoring), and (b) creating a deterrent effect that increases the perceived risk of detection, addressing the opportunity element. By shining a light on areas where economy, efficiency, or effectiveness are poor, VFM audit reduces the opportunity for fraud (CBN, 2010; Eze and Nwafor, 2020; Nwankwo and Okeke, 2019).

The Fraud Triangle Theory also explains why traditional financial audits failed to control fraud at PHCN. Financial audits focus on whether transactions are authorized and recorded correctly. They may not detect whether procurement prices are inflated (economy) or whether resources are being used efficiently. Fraudsters at PHCN could circumvent financial audits by ensuring that fraudulent transactions were properly authorized and recorded—they had the authority to approve their own fraudulent transactions. VFM audit, by contrast, looks beyond authorization to ask “Was this price reasonable?” and “Was this expenditure necessary?” This makes it harder for fraudsters to hide (Wells, 2017; KPMG, 2019).

Empirical research has consistently supported the Fraud Triangle Theory. Studies have found that organizations with stronger controls (reducing opportunity) and higher ethical standards (reducing rationalization) have lower fraud incidence. For PHCN, the theory suggests that VFM audit should focus on identifying and reducing opportunities for fraud, while fraud prevention should also address pressures (better salaries) and rationalization (ethics training) (Cressey, 1953; Wolfe and Hermanson, 2004).

2.2.2 Agency Theory

Agency Theory, developed by Jensen and Meckling (1976), describes the relationship between principals (owners/shareholders) and agents (managers). In the public sector, the principals are citizens (and their elected representatives) who provide public funds through taxes. The agents are public officials and civil servants who manage those funds. Agency Theory posits that agents may not always act in the best interests of principals due to information asymmetry (agents have more information about their actions and spending) and divergent interests (agents may pursue personal goals rather than citizen welfare). This creates agency costs, including the costs of monitoring agents (Jensen and Meckling, 1976; Premchand, 2019).

In the context of this study, Agency Theory explains how VFM audit reduces agency costs and controls fraud. Traditional financial audit monitors compliance (were the rules followed?). VFM audit goes further by monitoring whether agents used resources economically, efficiently, and effectively—the ultimate test of whether agents are acting in principals’ interests. When VFM audit reveals that an agent paid inflated prices (poor economy) or failed to achieve objectives (poor effectiveness), it provides evidence that the agent may be acting in self-interest rather than citizen interest. VFM audit therefore reduces information asymmetry and provides principals with the information needed to hold agents accountable. For PHCN, where citizens (principals) had little information about why electricity was unreliable despite billions of Naira in spending, VFM audit could have provided critical accountability information (Mellett, 2019; Chan, 2018).

Agency Theory also explains why management may resist VFM audit. If managers (agents) are engaged in fraud or simply poor performance, VFM audit threatens to expose them. They may therefore: (a) block access to data, (b) fail to act on findings, (c) retaliate against auditors, or (d) create the appearance of VFM audit without substantive implementation (decoupling). For PHCN, management resistance likely limited the effectiveness of any VFM audit conducted. The theory suggests that for VFM audit to be effective, auditors must have independence from management, and there must be strong oversight (e.g., by the Auditor-General and Public Accounts Committee) to ensure that management cannot suppress findings (Adebayo and Oyedokun, 2020; Okafor and Udeh, 2021).

Empirical research has found that organizations with stronger monitoring (including VFM audit) have lower agency costs and better performance. For PHCN, the theory suggests that strengthening VFM audit and ensuring its independence could have reduced the agency costs associated with poor management and fraud (Eze and Nwafor, 2019).

2.2.3 Public Interest Theory

Public Interest Theory, rooted in welfare economics and regulatory theory, posits that government intervention (including auditing) is justified when it serves the broader public interest. In the public sector, the public interest is served by transparent, accountable, and efficient management of public funds. VFM audit serves the public interest by: (a) providing citizens with information about how their money is being spent, (b) identifying waste, fraud, and inefficiency, (c) enabling corrective action, and (d) deterring future misconduct (Posner and Sunstein, 2018; Chan, 2018).

In the context of this study, Public Interest Theory explains why VFM audit is particularly important in the public sector and why its failure at PHCN represented a failure of public stewardship. PHCN managed billions of Naira in public funds—taxpayer money, government subsidies, international loans, and customer payments. When VFM audit was weak or absent, citizens were denied the assurance that their money was being used well. The massive fraud and inefficiency at PHCN represented a violation of the public interest. Public Interest Theory suggests that strengthening VFM audit across the Nigerian public sector is a public interest imperative, not just a technical or managerial reform (Ogbeifun, 2019; Oyo-Ita, 2019).

Public Interest Theory also provides a normative standard for evaluating VFM audit. A VFM audit serves the public interest if it: (a) provides information that is accessible and understandable to citizens, (b) identifies significant issues of waste, fraud, or inefficiency, (c) leads to corrective action, and (d) improves future performance. VFM audits that are technical, inaccessible, ignored, or have no impact do not serve the public interest. For PHCN, any VFM audits conducted may have failed this test. The theory suggests that VFM audit reports should be publicly accessible, written in plain language, and followed up by oversight bodies (INTOSAI, 2019; Mellett, 2019).

Empirical research has found that supreme audit institutions that publish accessible VFM audit reports and engage with civil society have greater impact on public sector performance. For PHCN and similar entities, Public Interest Theory suggests that VFM audit must be accompanied by transparency and citizen engagement to fulfill its public interest mandate (Adebayo and Oyedokun, 2019).

2.2.4 Performance Management Theory

Performance Management Theory, associated with Behn (2003) and others, explains how organizations can use performance information to improve decision-making, accountability, and results. The theory emphasizes the importance of setting clear goals, measuring performance against those goals, using performance data to manage operations, and reporting results to stakeholders. VFM audit is a form of performance auditing that evaluates whether performance management systems are effective and whether actual performance meets expectations (Behn, 2003; Moynihan, 2008).

In the context of this study, Performance Management Theory explains how VFM audit can detect fraud by identifying gaps between expected and actual performance. For PHCN, expected performance would include: (a) economy targets (e.g., procurement prices within 10% of market), (b) efficiency targets (e.g., transmission losses below 20%, collection efficiency above 80%), and (c) effectiveness targets (e.g., average power availability of 18 hours per day). When actual performance falls significantly below targets, VFM audit investigates why. In some cases, poor performance is due to fraud: low collection efficiency may indicate revenue theft; high transmission losses may indicate electricity theft; poor procurement economy may indicate kickbacks. Performance Management Theory suggests that VFM audit should be integrated into a broader performance management framework, where performance data is routinely collected and analyzed, and VFM audits are triggered by performance anomalies (Premchand, 2019; Okafor and Udeh, 2020).

Performance Management Theory also explains why PHCN failed despite having performance targets. Targets were set (e.g., reducing losses, improving collections) but were not enforced; performance data was unreliable (metering was poor, billing was inaccurate); and there were no consequences for poor performance. VFM audit can identify these systemic weaknesses and recommend improvements. For PHCN, effective VFM audit would have revealed that performance management systems were broken, not just that fraud existed (Eze and Nwafor, 2021).

Empirical research has found that organizations that use performance information for decision-making (including VFM audit findings) have better outcomes. For PHCN and similar public entities, Performance Management Theory suggests that VFM audit should be linked to performance budgeting, management accountability, and performance reporting (Behn, 2003; Moynihan, 2008).

2.2.5 Deterrence Theory

Deterrence Theory, rooted in the work of Beccaria and Bentham and formalized by Becker (1968), posits that individuals refrain from illegal or undesirable behavior when the perceived costs of the behavior (the risk and severity of punishment) outweigh the perceived benefits. Deterrence has two forms: (a) specific deterrence (punishment of an individual deters that individual from future misconduct), and (b) general deterrence (the observation of punishment of others deters potential offenders). In the context of fraud control, deterrence depends on three factors: certainty (the probability of detection), severity (the magnitude of punishment), and celerity (the speed of punishment). The more certain, severe, and swift the punishment, the greater the deterrent effect (Becker, 1968; Nagin, 2013).

In the context of this study, Deterrence Theory explains how VFM audit can contribute to fraud control by increasing the certainty of detection. When fraudsters know that VFM auditors are examining economy, efficiency, and effectiveness—not just compliance—they face a higher risk of detection. A procurement officer who knows that VFM audit will compare contract prices to market prices (economy) is less likely to accept a kickback in exchange for an inflated price. A supervisor who knows that VFM audit will measure output per employee (efficiency) is less likely to steal supplies while reporting inflated productivity. A manager who knows that VFM audit will assess whether targets are met (effectiveness) is less likely to divert resources while claiming success. By increasing the perceived certainty of detection, VFM audit creates a general deterrent effect (Wells, 2017; KPMG, 2019).

Deterrence Theory also explains why the effectiveness of VFM audit depends on follow-up. Detection alone is insufficient for deterrence; there must also be consequences (severity) and timely action (celerity). If VFM audit detects fraud but the fraudster is not punished (or is punished lightly after a long delay), the deterrent effect is weak. For PHCN, even if VFM audits were conducted, if recommendations were ignored, sanctions were not applied, and fraudsters faced no consequences, the deterrent effect would have been minimal. The theory suggests that VFM audit must be integrated with enforcement mechanisms (anti-corruption agencies, disciplinary boards, prosecution) to achieve its full potential (Becker, 1968; Nagin, 2013).

Empirical research has found that increasing the certainty of detection (through audits, monitoring, and whistleblower hotlines) is more effective at reducing fraud than increasing the severity of punishment. For PHCN and similar entities, Deterrence Theory suggests that VFM audit should be focused on increasing the perceived risk of detection, which requires regular, high-quality VFM audits with clear reporting and follow-up (Eze and Nwafor, 2020; Okafor and Udeh, 2021).

2.2.6 Synthesis of the Five Theories

Taken together, the Fraud Triangle Theory, Agency Theory, Public Interest Theory, Performance Management Theory, and Deterrence Theory provide a comprehensive, multi-layered theoretical foundation for this study. The Fraud Triangle Theory explains the conditions that enable fraud (pressure, opportunity, rationalization) and how VFM audit reduces opportunity. Agency Theory explains the principal-agent relationship and how VFM audit reduces information asymmetry and agency costs. Public Interest Theory provides the normative justification for VFM audit in the public sector—serving citizen interests. Performance Management Theory explains how VFM audit fits into broader efforts to measure and improve public sector performance. Deterrence Theory explains the mechanism (increasing the perceived certainty of detection) through which VFM audit deters fraud (Cressey, 1953; Jensen and Meckling, 1976; Posner and Sunstein, 2018; Behn, 2003; Becker, 1968).

The synthesis of these theories also guides empirical testing and practical recommendations. Research questions and hypotheses derived from this theoretical framework can focus on: from Fraud Triangle Theory, whether VFM audit identified fraud opportunities at PHCN; from Agency Theory, whether VFM audit reduced information asymmetry and agency costs; from Public Interest Theory, whether VFM audit served the public interest; from Performance Management Theory, whether VFM audit was integrated with performance management systems; and from Deterrence Theory, whether VFM audit increased the perceived certainty of detection. The framework suggests that VFM audit is most effective as a fraud control tool when: (a) it addresses fraud opportunities (Fraud Triangle), (b) it reduces information asymmetry between citizens and officials (Agency), (c) it is conducted transparently and reported publicly (Public Interest), (d) it is linked to performance management systems (Performance Management), and (e) it is followed by certain, severe, and swift consequences (Deterrence) (Creswell and Creswell, 2018).

In conclusion, the theoretical framework of this study is firmly anchored in five well-established, complementary theories: Fraud Triangle Theory (Cressey, 1953), Agency Theory (Jensen and Meckling, 1976), Public Interest Theory (Posner and Sunstein, 2018), Performance Management Theory (Behn, 2003), and Deterrence Theory (Becker, 1968). These theories collectively explain how Value for Money audit can serve as a tool for fraud control in the public sector, the conditions that enable fraud, the agency problems that VFM audit addresses, the public interest rationale for VFM audit, the performance management context, and the deterrent mechanism through which VFM audit reduces fraud. The framework provides a solid foundation for the conceptual framework (section 2.1), the research methodology (chapter three), and the interpretation of findings (chapters four and five) (Miles et al., 2020).