Who Evaluates Those Who Spend? Field Evidence on Cross-Functional Budget Governance

In most organizations, the people who execute spending are also the people who justify it and assess whether it was well spent. Boards and audit committees review budgets in aggregate, internal audit samples transactions after the fact, and finance teams consolidate figures they did not generate. This is a version of the classic question of who monitors the monitors. What receives far less attention is who independently evaluates spending at the level where spending decisions are actually made.

This matters because budget owners have every reason to protect their allocations. A unit that cuts its own costs gains little and risks losing resources in the next cycle. The result is familiar to any CFO: savings programmes that deliver in year one and fade by year three, and budgets that drift upward because no one with a different perspective challenges them.

In a recent article in Corporate Ownership & Control, I propose a mechanism designed to close this gap, and in a follow-up field study I examine nine years of evidence from its use in a regulated financial institution.

The Mechanism

The Cross-Functional Budget Governance Mechanism (CFBGM) does not replace the annual budget. It changes who is allowed to challenge it.

Each area’s cost packages (groups of related expenses, such as a service contract or a recurring cost category, presented with their justification for the period) are reviewed, on a recurring basis, by managers from other functions who have no stake in that spend. Reviewer assignments are non-reciprocal: if Finance reviews Operations, Operations does not review Finance, which removes the incentive to trade lenient reviews. The burden of justification rests with the cost owner, who must defend each line against questions from someone outside the function.

I call the effect constructive organizational friction: a deliberate, structured source of challenge that sustains cost discipline without adding layers of hierarchical monitoring. The friction is designed, bounded and recurring, rather than episodic and top-down.

Nine Years of Field Evidence

The mechanism has operated since 2017 at a Central Bank of Brazil-regulated financial institution. Over nine years (2017 to 2025), documented savings total R$276.4 million. Annual results varied widely, from R$3.3 million in 2021 to R$74.2 million in 2023, which is itself informative: the mechanism does not produce a fixed yield, and its output depends on the scope of spending under review and on operating conditions.

For 2023 to 2025, savings of R$162.1 million can be reconciled line by line against budget records, across 219 initiatives presented for review. Each recorded saving was validated by directors, and corrections and reversals are reported net rather than excluded. A smaller financial services unit within the same group adopted the mechanism in the early 2020s and moved from an operating loss to a profit within a year, though that second case is best read as an illustration rather than an independent replication.

Why Supervisors May Care

A former examiner at the US Office of the Comptroller of the Currency who reviewed the model observed that supervisors would likely view its independence feature favourably, provided reviewers have enough domain expertise to challenge credibly. The examiner also likened it to the “top down, bottom up” processes used in larger US banks, such as allocating risk appetite to business units and vetting assumptions in capital stress testing.

A more specific application concerns technology firms entering the banking perimeter. These firms often share staff, services and proprietary technology with non-bank affiliates. Under Sections 23A and 23B of the Federal Reserve Act, implemented through Regulation W, a bank must show that covered affiliate transactions occur on terms at least as favourable as those available from unaffiliated parties. When an affiliate supplies proprietary technology with no obvious market comparable, demonstrating this is hard. A structure in which costs proposed by the executing party are reviewed by parties without a stake in them could provide documented, repeatable evidence that the bank is not being disadvantaged. This application has not yet been tested.

What the Evidence Does and Does Not Show

The evidence is consistent with the mechanism’s propositions but does not establish causality. There is no controlled counterfactual, and I designed the mechanism and supported its implementation at both sites, an insider position I discuss explicitly in the field study.

Three boundary conditions stand out. First, competence: reviewers from outside a function bring independence but may lack the expertise to challenge technical spending credibly. Second, incentives: if reviewers are rewarded on savings alone, friction can turn coercive. Third, resourcing: review takes time from senior managers, so the mechanism must be scoped to spending where the challenge is worth its cost.

Implications for Boards

For boards and audit committees, the practical question is simple: for each major cost area, who outside that area has the standing and the information to challenge it? If the answer is no one below the CFO, the organization is relying on the self-assessment of those who spend.

Three steps follow:

1. Ask management to map who evaluates each major spending area, and whether that party has a stake in it.
2. Treat recurring, independent challenge of budgets as part of the internal control environment, not only as a cost-cutting exercise.
3. In banks with significant affiliate relationships, consider whether a structured cross-functional review could support the documentation of arm’s length terms.

The question of who evaluates those who spend is a governance question, not just a budgeting one. It deserves a place on the board’s agenda.

This post is based on the author’s article “Cross-Functional Budget Governance as a Mechanism for Enhancing Organizational Cost Control,” Corporate Ownership & Control, 23(2), 2026 (DOI: 10.22495/cocv23i2art2), and on a related field study in progress.

Thyago Lopes de Lima is an independent researcher in corporate governance.