Shortly before councils were reorganised, East Lothian district council leased leisure facilities to a trust and cashed in the capital receipts. But Robert Black, the controller of audit, believes the move was "illegal and improper". He has not objected to the money being spent on schools.
Mr Black submitted a formal report which led last week to an Accounts Commission for Scotland hearing in Haddington. East Lothian maintains the district's actions were "wholly within their legal powers".
Willie Innes, education convener, forecast "absolute uproar" among school boards and parents if the Accounts Commission stopped the council spending the rest of the cash. The council believes payments to the trust are a dead legal issue and any further action by the Accounts Commission would be a considerable waste of time and public money.
The commission replied that the hearing was to test whether the council had acted properly and within the law. It takes evidence from both sides before reaching a view.
Mr Black believed the district council handed the money to the trust to pay for the new council's functions at some stage in the future and not to finance any specific project. He accepts councils were entitled to increase their capital spending limit by leasing out certain facilities and points out that during 199495 the district increased its limit from Pounds 400,000 to Pounds 10 million within Scottish Office rules. The loophole has now been closed.
The new council has since drawn around Pounds 4 million from East Lothian Community Development Trust to improve school buildings. The rest of the cash will be spent over the next 15 months.