A damaging internal report by consultants Touche Ross which described financial irregularities at The Gilberd School, Colchester, forced Gillian Shephard to appoint two extra governors and draw up a list of suitable candidates for other governing body vacancies.

The Education and Employment Secretary has also threatened to replace up to five governors at Stratford School, east London. The school is running out of time to make improvements after failing an inspection by the Office for Standards in Education two years ago. Sources from the GM movement suggest it could be given another 18 months.

Mrs Shephard’s interventions have exposed the difficulties the Government has in forcing improvements in GM schools - a politically sensitive issue. In contrast to Hackney Downs, she does not have the option of sending in a team of experts - known as an education association - to take over the management of a GM school. She can merely replace or appoint extra governors.

This week the Government accepted the recommendation from the North East London Education Association that Hackney Downs be closed because of poor teaching and financial management.

Meanwhile, the Nolan Committee on standards in public life heard claims that GM schools were more accountable financially than any other education sector and that there were not enough “upsets” to warrant creating a support body for them.

The Gilberd School first encountered trouble earlier this year when a new headteacher, Len Brazier, was required to repay Pounds 1,341 of “inappropriate” expenses claims.

The Funding Agency for Schools - the quango which oversees GM finances - ordered an official investigation.

A copy of the Touche Ross report, obtained by The TES, found “a lack of adequate financial controls” at The Gilberd and a governing body which did not fully understand its responsibilities.

Touche Ross told the FAS that, for example, no receipts were provided for Pounds 4,000 relocation expenses obtained by the head and that there was no monitoring of Pounds 100,000 given to him to spend on the school as he saw fit.

It added that the governing body was divided and said two additional governors should be appointed by the Secretary of State. The governors should also consider disciplinary action against the head.

The two new governors are Ralph Gould, an educational consultant, and Robin Blackmore, a former head of Colchester police. Mr Gould is the husband of Daphne Gould, appointed as an additional governor and consultant to Stratford School by the Department for Education and Employment.

Stratford first hit the headlines after a public row between Anne Snelling, its head, and a faction of the governing body. In November 1993, it became the first GM school to fail an OFSTED inspection.

This month Mrs Shephard wrote to Stratford’s governing body threatening to sack some of the first governors and replace them with her own appointees to secure a working majority. The governors under threat claim that the DFEE is attempting to take over the school for political ends.

Recent exam results have been encouraging, with the proportion of pupils receiving five GCSEs at grades A-C rising from 4 to 28 per cent in three years. However, the most recent inspection by HM inspectors last spring identified weaknesses in the leadership of some curriculum areas.

John Swallow, a past president of the National Association of Headteachers and one of the governors at risk, said: “I was for 20 years the head of a large comprehensive in Essex. I know a poor school when I see one. This is not a poor school, it’s a well-run school.”

The school faces a fourth inspection early next month.

David Blunkett, the shadow education secretary, said: “The Government must be consistent across all schools in the action it takes when problems arise. ”