In what is shaping as a major public-sector scandal, a confidential audit seen by Fairfax Media reveals Education Department officials directed millions of dollars into the accounts of select schools only to later withdraw money to spend as they wished.

Known as the Program Coordinator Schools or "banker schools", the system involved select government schools receiving funds that could be used to pay for improved facilities and new education programs across their regions.

A confidential January 2011 Education Department audit reveals some of the money was spent on international travel, leased vehicles and alcohol without any financial safeguards and in a manner that created a "high risk" of fraud and presented the government with "signficant reputational risk".

Of even greater concern, little or no documentation has been found to account for how much of the money held by the banker schools has been spent.

A second secret departmental report seen by Fairfax Media also raises serious probity concerns, with former senior education bureacrats found using their taxpayer-funded credit cards to buy jewellery, alcohol, books and lavish lunches.

In an example of the lax financial controls within the department at the time, a top former official was found to have presented 61 statutory declarations to account for a portion of his 2010 spending because he could not produce tax receipts.

The alleged misuse of public funds has shocked senior government officials because it involves the brazen abuse of taxpayer dollars that should have been spent improving facilities at under-privileged schools.

The revelations could prove problematic for the newly elected Andrews government because the financial transfers covered by the audit occurred when the ALP was last in power. 

Fairfax Media can also reveal that the Independent Broad-based Anti-Corruption Commission is taking witness statements as part of its major inquiry into the education department.

IBAC in October confirmed it was investigating allegations of "serious corruption" within the department. 

Some past and present top education public servants have recently engaged prominent Melbourne criminal lawyers to represent them at secret coercive hearings held by IBAC, in which suspects and witnesses must answer questions honestly or face criminal charges.

The confidential 2011 audit found the banker schools held $28 million and that the fund was being operated by senior Education Department officials in breach of the state's Education and Training Reform Act.

Fairfax Media understands IBAC investigators have asked principals of banker schools to provide invoices to account for the expenditure of funds received from the Education Department.

The 2011 audit described the fund as an "unidentified and poorly controlled shadow financial system" that involved the "late and non-transparent" movement of money that breached national accounting standards and Victorian government purchasing rules.

It warned of a high risk of corruption but added that a limited review of cases had not established evidence of fraud. The audit identified two "critical risk" areas and rated three others as "high-risk".

"The outcome of the review clearly indicates that governance and controls ... are wholly inadequate," the audit warned. "There is a complete lack of accountability and oversight for the activities and expenditure ...  and these practices have continued over a number of years with no reporting or compliance."

"It is recommended that the current operations of the [fund]... be discontinued immediately."

The audit found banker schools were benefiting by being able to keep interest earned on the money they held. Some also received extra grants from the department.

One of the banker schools, John Fawkner College in Melbourne's north, received substantial Education Department support in 2008 to build a $1.1 million, FIFA-standard soccer pitch.

The audit found transfers of more than $100,000 being made by officials who only had the delegated authority to deal in amounts up to $20,000. Transfers often happened on school holidays to avoid detection, the audit found.

More than $300,000 was taken from select banker schools in three regions to pay for a 2010 principals' conference. No documents can be found to show any tender for services for this contract or approval for the consumption of alcohol.

The audit also found $100,000 was taken from a banker school to pay for a professional development course for the Education Department's Gippsland region leadership team. No supporting documents could be found to show how that decision was made or the funds acquitted.

In another case, the banker schools program received a $37,797 invoice for director services of a 2010 department program called IdeasLab.

The invoice, which covered just three months' services, included a return trip to Malaysia and five nights' accommodation in Kuala Lumpur. No documents exist to show who travelled there or who approved the trip.

Money held by banker schools also paid for the leasing of 10 cars for Education Department regional staff at an annual cost of $100,000.

Fairfax Media also last month revealed how four Education Department regional directors held shares in the company given a $60 million contract by the former Brumby government to build the now-defunct Ultranet IT project. Three of those directors have since left the department, but one remains.

A department spokesman said stronger governance and audit processes and procedures had been introduced to banker schools in the wake of the 2011 internal audit. He declined to comment when asked if the department had referred the findings of its internal audit to investigatory bodies.