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I'd guess that the topic only marginally differs in different geographical regions. I narrowed the question to government agencies, because privately funded projects usually have contractual obligations that may vary substantially on individual basis and that may also not be publicly visible.

Let's assume a university employed researcher (e.g. tenure-track faculty) successfully applied for a grant, i.e. an amount of money for a defined period of time intended for research on the topic stated in the grant proposal.

As time goes by, the work progresses, papers are published, students work on their theses, etc. There is no apparent evidence of any foul play. However, the PI in question embezzles a relatively small but significant amount of money for various purposes (own pockets, financing another project, lab equipment that is not related to the project, ...).

Under what circumstances would the funding agency suspect that there wasn't enough progress made / work done or a misappropriation happened with the granted funds and start investigating? What are the mechanisms for detecting such cases?

Note that I causally link lack of progress and misappropriation mainly for illustrative purposes and I'm not suggesting that one can't happen without the other or that embezzlement is the only reason for poor results (or the only illegal action for that matter). Indeed, the discussion regarding the opposite case, i.e. when embezzlement happened, but the project yielded excellent results nonetheless, would be interesting for another question. My question is primarily concerned with the when and whether a funded project can be deemed insufficient and thus lead to an investigation.

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    "I'd guess that the topic only marginally differs in different geographical regions." - I'd guess otherwise. – ff524 Jan 26 '17 at 9:49
  • Embezzlement is a crime. I believe most crimes are discovered because a witness steps forward. In this specific case an institution's own financial controlling is supposed to prevent or discover and report it. I believe it is unlikely that the funding agency could detect anything other than the more extreme cases. – Roland Jan 26 '17 at 11:27
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    Most significant projects, at least here in Europe, are always "investigated". That is, there is always an end-of-year and/or end-of-project audit, and all money that has not been used according to the funding agency's regulations is requested back. Note that it is not usually the PI personally who manages grant money, but some university department who also oversees that money is spent according to the rules. It's not like grant money is sent to the private banking account of the PI. – xLeitix Jan 26 '17 at 12:29
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    At least in my experience, this isn't something funding agencies concern themselves with directly; unless something is brought to their attention, it isn't really possible to measure by productivity anything but a gross misuse of funds. They defend against embezzlement by working through other institutions (universities) that monitor the use of funds directly, including every line-item of a purchase card statement; the reports back to the funding agency are quite sparse in comparison. – Bryan Krause Jan 26 '17 at 19:28
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    @RobertColumbia As I said, the supervision of whether all the money went into the research or not happens independently of whether the research goals were achieved or not. If you spent 50k of your grant to buy a new car, the NSF won't care a bit whether you also achieved your project goals. Embezzlement is embezzlement. – xLeitix Jan 26 '17 at 19:32
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Funding audit is orthogonal to success

The criteria for success of a project generally rely on particular measurable goals as promised in the project application. Enforcement of that is often handled by making parts of funding conditional to submitting the required deliverables and evidence of appropriate milestones. Usually, no research project is optimistic enough to promise that conclusive results will be in these deliverables (if you already know the result, why is research needed?) but it may specify e.g. certain data sets, analyses, and quantity of scientific publications that must be delivered.

However, it's not really relevant to the question of misappropriated funds. A funding agency may (and often will) audit the expenses of successful projects, possibly randomly, and possibly all of them. For example, I have participated in grants where a proper third party audit (paid by the receiving institution) was a mandatory requirement in the project planning, an inalienable part of the contract, and a "successful" audit report was required for the final payments.

Furthermore, as with taxes, they don't actually have to investigate that much or prove anything - it's your duty to provide appropriate evidence. If they "gave you $100,000 to find out whether camel milk is more nutritious for children 5-10 than cow's milk" but you can only provide evidence of paying $50,000 for camels because you spent the other $50,000 on something inadmissible, then you're simply not receiving the full $100,000 from them, no matter what scientific results your project achieved - and if they have already paid out more than that, then you legally owe them and they will collect it from the institution. And yes, the funding requirements will be set out so that they will disqualify any institutions where it's reasonably possible that they won't be able to repossess the advance.

Expenses are planned in detail beforehand

It's quite unlikely to simply be assigned "$100,000 to do X" - what would actually happen, is that the project plan would specify the expenses required for the project. If the submitted budget proposal states that your camel milk research is going to involve buying a fancy car for $50,000 then it's likely to rise issues before (and if) the project is selected and approved. If the approved budget proposal states that you'd spend $50,000 of the grant on camels and you then decide that you'd actually want to buy something else for that money (no matter if it's that car or directly buying camel milk instead of camels), then you'd generally have to get an approval from the funding agency for this modification.

Also, often the funding is structured so that they pay after the fact - i.e. the institution buys equipment and pays salaries, and the funding agency only reimburses these expenses when (and if) they're acknowledged as appropriate for the project goals. It's a reasonable scenario that sometimes happens that some expenses will not be reimbursed for some reasons - in that case, the institution has spent that money but won't get funding for it, tough luck. It may result in "allocating" that expense so that it reduces institutional funding available for that PI for other goals.

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