Prime Minister Scott Morrison's office took a direct role in suggesting projects that should be funded under the controversial sports grants program, with "comfortably dozens of emails" back and forth, the audit office revealed on Thursday.
Brian Boyd, an executive director in the Audit Office, also blew up the Coalition's repeated defence that no ineligible applications were approved.
While the grants had all been assessed as eligible by Sport Australia, 43 per cent of projects were not eligible by the time agreements were signed, he said.
Senator McKenzie lost her ministerial post over her handling of the sports grants after auditor Grant Hehir found she had largely ignored the rankings given to projects by Sport Australia and instead drew up a spreadsheet of marginal electorates and electorates the Coalition was targeting in the election.
The auditor found she had also taken representations from Coalition MPs about what projects should be funded in their electorates.
Mr Morrison has distanced himself from the allocation of grants, telling the Press Club: "All we did was provide information based on the representations made to us."
But Mr Boyd said there were "comfortably dozens" of emails between Senator McKenzie and Mr Morrison's office from the middle of October 2018 until April 2019 when the grants were being decided.
Senator McKenzie drew up a spreadsheet that colour-coded grant applications according to which party held the seat and which seats the Coalition was targeting.
Mr Boyd confirmed Mr Morrison's office had asked for changes and had sent suggestions - but he said there was no evidence that suggestions from Mr Morrison's office had been any more successful than those from others.
And he said lists had come from state party bodies, including a case where the Queensland Liberal National Party had put together the list for the marginal electorate of Longman. Longman was one of the seats the Coalition won from Labor at the election.
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"Wish lists" had come forward, then lists labelled "fighting for". Mr Boyd said Senator McKenzie's office did not appear to have made decisions based on the program guidelines or merit rankings. Nor was it clear why some representations from local MPs were successful and others weren't, with no records made about why some projects were funded and others not. Some projects were on the "approved" list at some points and then not, and vice versa. Some decisions changed even after Senator McKenzie had signed the funding brief, he said.
The only criteria the Audit Office could trace was the priority given to marginal and targeted electorates - Senator McKenzie's office had documented its focus on this, and it was borne out in the decisions, he said.
The revelation that 43 per cent of projects were ineligible when they were funded came as Liberal Senator Eric Abetz was seeking to shore up the government's position.
"You did find that no ineligible project or application was funded?" Senator Abetz asked Mr Boyd.
"No, senator that's not what we found," he answered.
Among ineligible applications were five late applications, four that did not meet the guidelines but were amended, eight projects that were completed before the funding grant was signed, and more than 270 where the project had started before the funding agreement was signed.
"So we get to around 43 per cent of those which were awarded funding, by the time the funding agreement signed, were ineligible," he said.
Mr Morrison told the Press Club on January 29, "It's important to note that the auditor-general did not find there were any ineligible projects that were funded under this scheme, and nor did he say that rules had been broken. There was a ministerial authority to make decisions in this matter, and that's what was exercised."
Auditor Grant Hehir said in his audit that he could find no legal authority for Senator McKenzie to be making the funding decisions about funding in the first place. This was disputed by the head of the Prime Minister's Department, Phil Gaetjens, according to Mr Morrison.
In Thursday's hearing, Nationals Senator Matt Canavan sought to discredit Sport Australia's assessment process, pointing out that assessors hadn't been trained and had come up with very different rankings for the same projects. Tennis Australia had also got a head start on "mum and dad" applicants by getting the guidelines early, he said.