Garrett after answers from Islamic school over funding

A FEDERAL government audit into Sydney's largest Islamic school has slammed its financial practices.

A FEDERAL government audit into Sydney's largest Islamic school has slammed its financial practices, questioning why millions of dollars were being paid in lease agreements and backdated management fees to its land owner, the Australian Federation of Islamic Councils.

The release of the audit by Education Minister Peter Garrett follows a decision by the NSW government to freeze state funds to the Malek Fahd Islamic School after an investigation found the nation's peak Muslim body was charging the school millions of dollars in improper fees.

The investigation came after The Australian revealed last year that $5.2 million in fees and backdated rents was being paid by the western Sydney school to AFIC in 2010, which included millions in unaccounted management fees.

The audit found millions of dollars in transactions that were "not in the best interests of the school for the years 2008 through to 2011".

It found the school was paying up to $1m over the market rate in rent for its main property, no evidence of value for money for $300,000 paid in "IT services" and no evidence of value for money from $2.4 million paid in management fees.

Mr Garrett told The Australian while investigators had found the school was using commonwealth funds for educational purposes, there "is a bigger issue here" of payments to AFIC, demanding a new plan of governance for the school by May.

"There are clearly some major concerns about the financial decisions taken by Malek Fahd Islamic School and I want to get to the bottom of them,'' he said.

"We need to see a better explanation from the school about its financial relationship with the AFIC and why the millions of dollars it handed over to the federation was the best use of its money."

In a letter obtained by The Australian to the school's principal, Intaz Ali, Mr Garrett makes clear his concerns about the school's "inflated" transactions, and the role of members of the school board who also sit on the AFIC executive council - including AFIC president Ikebal Patel, the school's chairman of directors.

"These transactions were a result of decisions from the school's governing board, which has a significant representation of individuals who are also members of the board of AFIC and/or appointed by AFIC, and I consequently have concerns regarding the potential for conflict between the interests of the school and its students on the one hand, and the financial interests of AFIC on the other," Mr Garrett wrote on March 21.

Mr Patel has not responded to a request for a comment from The Australian.

The commonwealth has stopped short of following the NSW government in freezing the school's funds, which would force the school's closure.

According to the school's financial statement, it received $19.6m in state and federal government funding in 2010, accounting for 74 per cent of the school's overall funding. Government funding is provided to the school. The school and AFIC are not-for-profit organisations.

The audit found the school "has not demonstrated that it has obtained value-for-money" for the $2.4m paid in retrospective management fees or for the $300,000 in other fees for IT and consultancy services.

It also found the millions in pre-payment of rent by the school to the AFIC - which included a $2.59m back-rent payment after the school retrospectively altered the lease - was of no definable benefit to the school.