Vice chancellors' salaries and those of other senior members of university staff may have to be approved by the Higher Education Funding Council for England in future following the furore over the outlawed golden handshake at Huddersfield University.

The funding council said it was "reviewing urgently" guidance for universities as a result of Huddersfield's controversial Pounds 500,000 severance deal for its vice chancellor, now withdrawn under council pressure.

The fallout from the National Audit Office's inquiry into the affair could be more serious for higher education than anticipated.

The NAO report says the funding council is considering "whether to issue guidance to institutions on the best practice to be followed in setting vice chancellors' and other senior staff's salaries and severance payments".

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The Committee of Vice Chancellors and Principals this week warned against panic measures. "Our main concern is to ensure that vital principles of autonomy and academic freedom are not endangered by any hasty panic reaction," said a spokesman, adding that the CVCP favoured more openness.

Graeme Davies, chief executive of HEFCE, has written to vice chancellors requiring disclosure of any severance payments to staff of more than Pounds 50,000. Huddersfield told Professor Davies this week that it had agreed to set aside the severance deal offered to Kenneth Durrands and the salary increase awarded to him from February 1. Professor Davies called the deal "excessive".

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The NAO stepped into what it calls "severe turbulence" at Huddersfield after pressure from local MP Barry Sheerman. The report by comptroller and auditor general John Bourn says that the Department for Education will consider whether arrangements for the governance of institutions of higher education need to be altered to provide greater accountability.

They will also hold discussions as to whether the new arrangements should be applied to further education colleges and grant-maintained schools.

Meanwhile, the NAO will examine whether "this kind of payment" occurs more generally in the publicly-funded education sector.