Anyone who doubts that higher education needs to be liberated from the dead hand of government should look no further than the ³ÉÈËVRÊÓƵ Funding Council for England's audit report on the University of Cambridge.

Let's start with the fact that Cambridge is the best university in Europe, and the only one that gives the Ivy League a run for its money. The best you can say about Hefce is that it is a fudge to square the unsquareable contradiction between universities' theoretical independence and their actual subservience to the government hand that feeds them.

So, what does Hefce find to complain about? Cambridge doesn't run itself in the way that the Committee of University Chairs (CUC) regards as best practice. So what does it regard as best practice? Astonishingly, CUC thinks that universities should have governing councils chaired by people like themselves. Gosh, who'd have thought it. And where does this model come from?

Hefce has just enough sense to hide the truth - that this is the same regulatory model that has been such a stunning success in the banking sector with Enron, WorldCom, the Royal Bank of Scotland, Lloyds TSB, HBOS, etc. It doesn't mention that the universities with the happiest students are the oddities - Cambridge, the University of Buckingham, the University of Oxford and The Open University.

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On we go. Is Cambridge's governance a matter for Hefce in the first place? No. The council knows that it can ask for assurances that the money it gives Cambridge, which makes up about a quarter of the university's budget, is properly accounted for. Beyond that, it has absolutely no authority over Cambridge or Oxford.

One important difference between Oxford and Cambridge is that the latter has more backbone than the former: legally speaking, they are in the same boat. Their statutes are a matter for them. Sir Alan Langlands, Hefce's chief executive, knows this very well, as did his predecessor, David Eastwood, although one wonders whether the authors of the reports into Oxford and Cambridge knew it, too.

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So, who is up to what? It is not obvious as Hefce has never discussed the matter. Since it is none of its business, it would be an odd discussion, if it were to do so. Phrases such as ultra vires and "judicial review" spring to mind.

Were it to do so, the principle of the same sauce for the goose and the gander might demand opening up a few other cans of worms - Hefce might start asking about the councils of the University of East London, Leeds Metropolitan and London Metropolitan universities, to name but three.

But let us not descend to making unkind remarks about the insensitivity of those who have prospered under new Labour and what is called "avoiding the appearance of impropriety" in the US. Let us stick to the virtues of Cambridge and the institutional cloth-headedness of Hefce.

Hefce is a dozen years behind the curve. If anyone in it read a newspaper, they would discover that the likes of Jack Welch, the former head of General Electric, reckon that good companies prosper by looking after the company, the customers and the product.

In higher education, this translates to the university, the faculty, the students and the intellectual quality of their work. How much does the "lay majority" that Hefce's audit officers are so keen on know about that? Something between nothing and very little.

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Yes, you need good auditors, good accountants, and if you are lucky enough to have endowments, good investment managers. Do you need outsiders to tell you how to run a university? You do not.

Since the public pays (some of) the bills, it has a right to know that the money has been spent efficiently: that is a matter for audits, strictly and narrowly defined. If the public doesn't want universities, it can turn the tap off and deal with the consequences.

Why do Hefce and the Government bang on about lay majorities? They were sold a story about organisations being captured by "producer interests" 30 years ago, which fuelled Mrs Thatcher's hostility to the professions. Given half a chance, doctors jack up their incomes and never see a patient; lawyers ditto; academics ditto.

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With products sold in a competitive marketplace, such as cars, the market removes the inefficient ones. We think markets work badly in health and education, so governments police the producers - hence non-executive boards to supervise universities.

But the preferred model suffers from a less-discussed vice. Its modern title is "executive capture". Jeremy Bentham nailed it two centuries ago with the observation that a committee that was not an inquisition would be a screen, and so it is with university councils. The remuneration committee pushes up the salaries of the executive - not just vice-chancellors - and the council as a whole screens the executive from rank-and-file criticism. Solidarity among workers is rare, but deeply committed collective self-interest is the norm among executives.

So, what would help? Nothing is perfect, but the best answer is what Cambridge has, the virtues of which are so obvious that Oxford's senior management team has spent a decade resisting its importation. This is its Board of Scrutiny.

Its members cannot occupy executive positions; it has the power to call for any paper it wants and to interrogate anyone it chooses. It meets regularly and writes very useful and unvarnished reports - the one on the troubles with Cambridge's accounting system more than a decade ago was a model of its kind. It holds the executive's feet to the fire, and every university should have one - starting with Oxford.

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