THE number of colleges in financial difficulty threatens the future of further education in England, according to Parliament’s spending watchdog.

It says all college accounts and applications for funding should be audited directly by the National Audit Office from now on.

“If Parliament is to gain assurance that the pound;3 billion of public money going into the sector is spent properly and effectively, the comptroller and auditor-general should be appointed to audit all college accounts and funding claims,” said David Davis, chairman of the influential parliamentary public accounts committee.

Such a move has already been made in Scotland and is being considered in Wales, reflecting the committee’s view that the sector is badly audited by medium and small-sized accountancy firms.

It will effectively mean closer scrutiny of the sector by Whitehall after the Further Education Funding Council’s role is taken over by the Learning and Skills Councils on April 1.

Patchy standards of governance, financial problems inherited when colleges were incorporated as autonomous institutions in 1993, and the “byzantine” funding system are blamed for the crisis, said MPs in a report published by the committee this week.

Mr Davis says too much of the FEFC’s time is spent fire-fighting to get colleges out of financial trouble. This situation would never have developed if there were tighter controls.

“Most colleges manage their financial affairs successfully,” he said. “But 20 per cent have consistently failed to do this and there is no sign of significant improvement. The answer must be to stop colleges getting into financial trouble in the first place.

“We have seen a succession of cases of poor financial management and governance.”

The proportion of college deemed to be in poor financial health increased from around 5per cent in 1994 to 20 per cent in 1997. After a dip of 13 per cent in 1999, it returned to 17 per cent in 2000, despite the fact the FE sector as a whole is in surplus.

MPs highlighted the case of Bilston Community College, west Midlands. Bilston had been regarded as a textbook example of franchising and off-site provision but found itself in a financial mess - which ultimately led to its closure - after changes to funding policy in 1997. The college’s heavy reliance on franchising led to debts of more than pound;10 million, leaving accountants with the job of unravelling a vast web of companies.

“There have been substantial losses to the public purse arising as a result of the position at Bilston College, said MPs.

“The funding council needs to bring its investigations of the Bilston affair to a conclusion and take action to recover this money.”

The report also cites the “appalling mismanagement” at Halton College, Cheshire, adding that “failures of internal and external audit meant that these problems were not picked up and reported when they should have been”.

“Some colleges have squandered their right to independence,” said Paul Mackney, general secretary of the lecturers’ union NATFHE. “But the real problem for the sector is the shortage of public funds, not their misuse.”

While refusing to comment on the wisdom of the rush for franchise agreements by expansionist colleges, which was encouraged by the previous government after incorporation, the FEFC says this area of activity has played a role in the problems highlighted by the committee.

“We would say that the rapid withdrawal of funding for franchising is partly responsible for the decline in some colleges’ financial health,” said an FEFC spokesman. He said the FEFC itself has advocated a role for the National Audit Office in FE finance.