Scottish colleges are in a much healthier financial position than would have been believed possible a year ago, although that is as much due to hefty injections of government cash as to superior management.

The latest report from the Auditor General for Scotland, published yesterday, reveals that a pound;14.1million operating deficit in 2000-01 was turned into a pound;2.3m surplus by 2001-02.

More impressively, 24 colleges - 19 of them with deficits the previous year - achieved surpluses. The number of colleges with operating deficits was reduced from 34 to 18. The “health table” ranges from Edinburgh’s Stevenson and Inverness colleges, each with a pound;1m surplus, to Kilmarnock with a pound;2m deficit.

The Scottish Further Education Funding Council has set the end of July 2006 as the deadline for colleges to achieve financial security. Robert Black, the Auditor General, reckons that only one college, Lews Castle in Stornoway, will still be classified as “very weak” financially by that date compared with five last year; the number regarded as secure will rise from 24 to 37 in the next three years.

Lews Castle and West Lothian colleges were the only ones not to have set timetables for the elimination of their deficits by the end of the Auditor General’s reporting period.

Mr Black commented: “On the surface this is an improving picture.” But he said the funding council needs to remain vigilant to make sure the 2006 target is met.

Additional cash from the Executive totalled an extra pound;40m in its annual grant and a one-off pound;7m for nine colleges in the greatest financial difficulty. Staff restructuring had also helped to wipe out deficits.

But, Mr Black’s report states, this still left three colleges with higher deficits than forecast - Kilmarnock, Lews Castle and West Lothian. He expressed particular concern about the operation of Lews Castle College and the financial recovery plans at Borders College.

His report acknowledges that Kilmarnock has been hit by reductions in European funding and by “exceptional restructuring costs,” while West Lothian has had well-publicised problems with the costs of its new privately-funded campus (TESS, May 23).

There is further anxiety that eight colleges are kept going only because of their government grants or overdraft facilities. Mr Black therefore recommends that, as even the improved position is so fragile, “colleges will require close monitoring as they move to financial recovery and financial security.”

He adds: “It is important that colleges take appropriate action to ensure continued financial support is in place.”

But the Audit Scotland report commends the funding council’s efforts to improve colleges’ financial accountability, restructure FE in areas such as Glasgow and invest more capital to renew properties.

The report also notes that colleges’ own assessments of their internal financial controls are supported by auditors; none of the auditors found any inconsistencies, although more work had to be done on risk management.

Colleges are particularly warned to keep a close watch over their early retirement costs to ensure they do not run too far ahead of income projections. There should be a professional valuation of these costs and the funding council has already commissioned actuarial tables to make sure colleges get it right.