Auditors say fewer than half of LAs complied with regulations for reporting per-pupil funding in 2007-8 because the accounting system is too vague and has led to distortion. The findings mean it is impossible to tell if LAs are underfunding the schools which claim to be cash-strapped.
Latest figures from the Assembly government show there is as much as pound;1,400 difference in the amount of money spent by LAs per pupil in Wales. Some critics say up to 25 per cent meant for the chalk face is being held back by local authorities - 10 per cent more than before devolution.
Almost half of LAs did not spend the indicator-based assessment on education last year, which is the amount recommended by the Assembly government.
The auditors gave evidence to the Welsh Assembly's enterprise and learning committee earlier this month. AMs were investigating how far 23 recommendations aimed at overhauling school funding in Wales, made by a cross-party committee in June 2006, had been acted on.
Auditor Huw Lloyd Jones said there was still a lot of work to be done to make funding arrangements clearer. He said changes to the Assembly government's Revenue Account Form were vital for consistent reporting of LA spending in schools.
Calls to clear the education "funding fog" in Wales were made by all heads and teaching unions giving evidence to the committee during 2005-6. Most supported moves to ring-fence some cash to schools through bypassing local authorities, which they claim were not passing on their full entitlement.
But Professor Glen Bramley, from Heriot-Watt University in Edinburgh, who also presented evidence to the committee, said school funding could never be that simple. He said experts had to be trusted in their calculations.
"In my experience, demands for simplicity and transparency end up being too crude, and they make no attempt to reflect the socio-economic needs examined in the study," he said.
Education minister Jane Hutt told the committee that school funding arrangements had become clearer since the committee's recommendations. She said an easy-to-understand school funding information service would go live on the government's website next month.
But Rex Phillips, organiser for the NASUWT Cymru union, said he believed the "fog was getting thicker". Other teaching unions cite a lack of progress.
There was also concern that the committee's recommendations are about to be sidelined by Professor Bramley's findings in his review of school funding in Wales.
He hints at an overhaul of the unpopular school funding formula in Wales, moving to one based on need. He sees poverty and special educational needs as key areas to concentrate on in a bid to raise academic obtainment.
Ms Hutt said during the meeting: "Professor Bramley's conclusions are powerful and I recognise and acknowledge them. This would move us towards an outcome-orientated methodology, away from our historic patterns."
But Tory education spokesperson Alun Cairns claimed it would mean local authority spending would become lower than it is now, making his plans "wholly unacceptable".