Recently, there is a growing interest in the principles of fiscal federalism in a number of countries to improve their ability to serve their people more efficiently and effectively.However, very little academic literature exists particularly on how to best utilize and ensure accountability with regard to federal budget grant to sub-national governments in federations. The study tries to assess the degree to which regional governments are accountable to and properly utilize the federal government budget subsidy. It also discusses the challenges of Supreme Audit Institutions (SAI''s) in Ethiopia. The study reveals that federal budget subsidy is neither monitored nor subject to any meaningful sanctions. This is largely due to the executive dominance over the legislature and lack of appropriate legal framework to ensure accountability. Besides,Supreme Audit Institutions have been facing enormous internal and external challenges which seriously curtailed its effectiveness and development. The study, therefore, helps shed some light on fiscal federalism, and should be especially useful to professionals in federations and decentralized unitary states.