Grahame Arnold was the head of a successful school and chairman of Shropshire’s Secondary Heads Association. But he is now in jail, starting a two-year sentence for theft on a grand scale.

Last month a jury at Shrewsbury Crown Court found Mr Arnold guilty of 30 charges of theft. Arnold had used school money to pay off spiralling credit-card debts.

Arnold was head of the Adams school in Wem, a small market town. The last Ofsted inspection, in 1996, had said the school exercised “excellent financial control” over its money. But these “excellent” controls failed to prevent Mr Arnold extracting more than pound;80,000 between 1995 and 1999. The thefts only came to light during a local authority audit in 1999.

Arnold’s offences went undetected for so long because the money was taken largely from the school’s private funds.

All schools maintain these private accounts, which cover money raised for school trips, cash raised by parents and income generated from things like sweets machines and school-uniform sales.

The problem is that this is not public money and so is not subject to audit by the local authority. School governors have legal responsibility for it, but financial controls vary. A local education authority officer agrees that controls over private funds are often unsatisfactory. “Many of these accounts are signed off if the figures add up,” she says. “That’s not an audit. Sometimes the process is in the hands of a parent or a governor. That’s not good practice.”

This kind of informal arrangement may now have to change. From next year schools will have to use a common format to report the state of their finances. The aim is to allow genuine comparisons of how different schools spend their money. So-called “Consistent Financial Reporting” is the first step in that process.

But the Department for Education and Skills is looking at local authority audit procedures. A pilot scheme due to report this month has been looking at annual audits, but the idea does not have universal support. “We have concerns about our ability to resource an annual audit,” says Mike Hart, Warwickshire’s finance manager. “It would create an army of auditors.”

In Warwickshire a risk assessment decides how often a school should be audited. “High-risk schools get an annual audit,” says Mr Hart. “Low-risk schools are audited on a less frequent basis.”

The risk analysis looks at the individual school and its characteristics. What financial systems are in use? What is their budget management like? What is their level of engagement with the LEA? How a school does academically does not affect this analysis. An excellent school might get annual audits if its financial regime were unusual.

Warwickshire’s audit services manager Gary Rollasson confirms that his LEA’s use of risk analysis is unusual. But the county’s own auditors approve and the Audit Commission has cited Warwickshire as a model authority.

But even Warwickshire’s approach would probably not have detected Grahame Arnold’s fraud. It did not, for example, prevent one Warwickshire teacher getting into a muddle with school trip money at Alcester high school (“Disorganised trip leader loses school thousands”, TES, November 22). Both would have been outside the scope of an LEA audit.

Arnold was caught when school business manager Roger Dakin raised his concerns with Shropshire’s auditors. The county is trying to recover the money through the courts, with actions against Arnold and the external auditor who reported to governors on the school’s private funds.

Warwickshire’s Mike Hart says public and private money should be dealt with in the same way.

“The majority of money raised is spent in the school,” he says. “And for school trips the money is directly related to the curriculum. Logically that’s an area where the LEA audit framework should apply.”

In a few years time it might. No one is suggesting that theft on the Grahame Arnold scale is common, but there is concern that private funds, in many cases amounting to more than pound;100,000, are under-regulated. It also makes little sense to compare how schools spend money if private funds are left out of their financial reports. “It depends on how far the Government wants to push Consistent Financial Reporting,” says Mr Hart. “That will drive change.”

More on Consistent Financial Reporting at www.dfes.gov.ukvfmphil.revell@ukonline.co.uk