Many are building up huge deficits as they lay-off hundreds of staff in response to the FEFC’s call to drive down spending averages. But then, all too often, inspectors view these as overdrafts resulting from bad management, say principals.

Most are unwilling to complain for fear of being labelled troublemakers or of appearing to make special pleading. But they say too many college inspectors identify a large deficit or a lack of cash reserves as a result of bad management.

Senior inspectors challenged the claim this week and insisted it was not borne out by the analysis of grades carried out by former chief inspector Terry Melia.

But principals stuck by their claim, pointing to recent full inspection reports.

The consequence, they say, is that in inspection reports, grade 1s or 2s are given for almost everything except for management and governance and for quality assurance, which may only scrape 3s.

“If you think about it, this is a nonsense,” said the principal of one large college in the North-east. “If we are performing excellently, how can our management and quality be poor.”

Another principal told The TES: “Inspectors see reserves as a benchmark of good management. This really is a complete farce.”

Complaints have also come from colleges which have gained good management grades. Ken Ruddiman, principal of Sheffield College, inherited a deficit of #163;900,000 when he took over three years ago. This has grown to #163;5 million as a result of lay-offs.

But in an effort to cut average spending from #163;35 to #163;20 for each FEFC unit of cost, he has carried out a series of voluntary redundancy programmes. The latest, which he expects to be the last, was 100 job cuts taking #163;4.6 million off the payroll.

He received a grade 2 for management, which suggested that strengths clearly outweighed weaknesses. But he still expressed concern about the attitude of inspectors.

“The #163;5m deficit is not an overdraft and inspectors should not see it as such. It is the amount of provision we have to make for pensions. They expect us to come up with plans to clear such debts in three to four years but people will be drawing pensions for up to 30 years, ” he said.

Michael Austin, principal of Accrington and Rossendale, said: “When they came here they looked at the financial management and took a similar view of it, asking ‘Is the college in surplus or is it not?’ If not, it was seen as bad management. But things are not that simple.”

The latest college to illustrate the anomaly is Wilmorton, Derby. It was awarded straight 2s for everything except quality assurance and governance and management, which were given 3s.

David Croll, the principal, took over the college 18 months ago, following the damning report of an inquiry by Professor Michael Shattock into standards of management. It led to the first-ever summary dismissal of governors by the Secretary of State. College management was also given a grade 5 - “many weaknesses and few strengths” - by FEFC inspectors.

The college ran up a #163;2m deficit laying-off staff in order to meet the recommendations of the inquiry and to cover the last government’s decision to axe cash for growth.

Mr Croll was praised by his governors for turning the governance and management grade round from a 5 to 3 in just 18 months.

But they are understood to be disappointed that a grade 2 was “deserved” but not given. The college has submitted a recovery plan to the FEFC to eliminate the “debt” within three years.

But inspectors said the whole process of reporting was set for a shake-up under the new chief inspector, Jim Donaldson.

Auditors’ conclusions on financial health would in future be published alongside other inspection data, giving a clearer picture.