The stand-off between Lynne Donaldson, a Forres businesswoman, and the council has been simmering since February when an investigation by the funding council found Mrs Donaldson's complaint "unfounded" except in some matters of detail.
She is now seeking compensation from the council, believed to be a six-figure sum, over its report in 2001 which, Mrs Donaldson alleges, suggested she had misused her position as a member of the college board's staffing subcommittee to supply staff to the college - despite having resigned from the subcommittee in 1996.
She says this was not corrected in the full report which was put out on the council's redesigned website in 2002, and a footnote stating that she had resigned from the staffing subcommittee was not included in the executive summary of the report.
While Mrs Donaldson says she would be willing to go to mediation, she told The TES Scotland she was considering court action over what she suggests has been "a very serious miscarriage of justice". She said: "I don't want to go to court but I may have no option."
The council says it has nothing to hide, that it took the complaint seriously and that it carried out a thorough investigation. It has apologised for the omission of the footnote and has amended the website.
But the council insists this had no relevance to the crux of the issue which related to a committee meeting in 1995.
Mrs Donaldson has rejected the council's advice to take her complaint to the Scottish public sector ombudsman. That would not allow any compensation to be awarded and, she says, would be "a waste of public money".
David Wann, the council's deputy chief executive and secretary, said: "The council carried out two investigations into this complaint in accordance with our procedures and we found nothing that materially altered our conclusion that Mrs Donaldson did have a potential conflict of interest in the discussions at the July 1995 meeting of the board's staffing committee, that she should have formally declared that interest and removed herself from the process."
The discussion at that meeting was over the use of agencies to supply temporary education staff to the college, but Mrs Donaldson strongly denies that it involved staff supplied by her business. The meeting was to discuss redundancy issues, she said, and, since redundant staff cannot be replaced by temporary workers, there could be no conflict of interest.
According to the council's report, which dealt with the wider and well-publicised complaints about the running of the college by Robert Chalmers, the former principal, contracts with the college of services provided by Mrs Donaldson's business in the audited accounts rose in value from pound;7,615 in 1995-96 to pound;103,373 in 1998-99. This was "gross wages and not profit to myself," she stresses.
Mrs Donaldson says she specifically asked Dr Chalmers whether she could continue as a supplier to the college when she was approached to join the board and was advised there was no problem. There were other board members who supplied the college, she states.
She says she offered to leave the crucial July 1995 staffing meeting but was told by the convener and other members that this was not necessary. Mr Wann commented: "The investigation into the complaint looked at this and concluded that an offer to leave is not the same as a declaration of interest and actually removing oneself from the proceedings."
Mrs Donaldson and Clive Murray, a management consultant who has been representing her, believe the funding council took a harder line than the Scottish Office because of the sensitivities surrounding the management of colleges throughout Scotland.
The tangled tale is complicated by the fact that the fieldwork for the initial investigation was carried out by the Scottish Office which then handed the paperwork over to the funding council when it came into being in 1999. Mrs Donaldson says she was never interviewed. She was not told she was being investigated, not told what the investigation procedures were and not told what her rights were.
Mr Wann says the council's investigation concluded that she had several opportunities to comment on the report as a member of the board and as an individual. He points out that, when the board itself considered the council's draft report in March 2000, it did not support Mrs Donaldson's objections to the relevant parts.
This concurred with the findings of the funding council's own investigations into the complaint, the first one carried out by Liam McCabe, director of financial appraisal and monitoring, and the second by Laurence Howells, the then council secretary.
This is a particular bone of contention for Mrs Donaldson. She argues that Mr McCabe should never have been allowed to investigate since he helped compile the original report with John Sizer, the council's former chief executive.
She claims to have evidence that Julia Amour, council secretary at the time, had advised against Mr McCabe's involvement because of his previous role. This itself, Mrs Donaldson suggests, amounted to "a potential conflict of interest". Mrs Donaldson is also aggrieved that Mr Howells handled her appeal against that investigation since he had backed Mr McCabe's appointment to investigate the initial complaint.
The outcome of these investigations led Esther Roberton, chair of the funding council, to assure its members that Mr Howells had carried out an "independent review". Mrs Donaldson claims Ms Roberton has refused or ignored more than 20 requests for a meeting to discuss the matter.
The funding council says Mr McCabe's inquiry was in line with the council's procedures which require complaints at the first stage to be considered by the "appropriate director". The rationale behind this approach is that it is intended to provide an opportunity to resolve the issues by those closest to them, particularly where there are misunderstandings or misinterpretations. The council says this is normal practice.
But Mr Murray is not impressed by the council's explanations and says they do not appear to be in line with its commitment to "openness and transparency". The council points out, however, that it has offered to publish the report of its investigation into Mrs Donaldson's complaint but she has not given her consent.
Mrs Donaldson counters that she cannot give her consent until "discrepancies and inaccuracies are corrected."
Mr Wann insists Mr Howells thoroughly investigated Mrs Donaldson's complaints on five key questions and concluded they were unfounded:
* Was the conclusion about Mrs Donaldson's potential conflict of interest in the report on Moray College reasonable?
* Did the council give Mrs Donaldson a fair opportunity to put her case?
* Was the council reasonable in the way it handled the publication of the report?
* Was its handling and response to Mrs Donaldson's complaint reasonable?
* What was the significance of the information which the council was told about for the first time in September 2002 that Mrs Donaldson had offered to leave the July 1995 staffing meeting?
Mr Murray said that what he described as "smear and innuendo" had affected Mrs Donaldson's health and her business. She says her turnover was badly affected when the report came out. "It's been a nightmare, a living hell."
As far as any wider lessons for board members are concerned, Mrs Donaldson commented: "I would not recommend any small, independent trader to join a board because there is no back-up, especially when things go wrong."