West Midlands Police fraud squad has launched an inquiry centring on Hereward College, Coventry, and concerning alleged misuse of European Union funds.
The investigation has begun in the week the Further Education Funding Council published a damning inspection report on Hereward which includes the first grade five - the lowest possible mark - to be awarded to any college inspected so far.
The grade, indicating provision with "many weaknesses and very few strengths", relates to management at the college, which caters mainly for disabled students. The report reveals college principal Rees Williams had been "released by the governors from his duties within the college to manage projects in companies connected with the college". Two directors were left to manage Hereward in his absence, despite having neither the time nor authority to do so.
Four other aspects of provision, including quality assurance, are awarded a grade four, while just one area - equipment and learning resources - earns a grade one.
The report is based on an inspection which began last December. Shortly after it began, Mr Williams took long-term sick leave before retiring in July. All but two governors resigned.
Police were called in this month by the London office of the European Social Fund, backed by the college, to look into allegations of bids being made to the fund under false pretences.
Applicants hoping to win grants from the fund for educational projects must submit details of the total sum needed, and then secure 55 per cent of the cash from a public-sector supporter. If the bid is accepted, the social fund provides the remaining 45 per cent.
Inquiries at Hereward are believed to involve alleged bids being made to the fund improperly naming the college as backer without permission.
In addition to the focus on European cash, police are also understood to be considering examining whether FEFC funding to the college has also been improperly used.
Hereward is the second West Midlands college to be at the centre of a police fraud investigation. An inquiry is going on at Bournville College, Birmingham, after money was paid out for alleged bogus courses.
Hereward acting principal Catherine Cole, who joined the college in March, said the inspection report was already history.
She said: "A lot of good has gone on all along in this college in very difficult and adverse circumstances.
"The FEFC would not have funded students to come here this year if they were in any way doubtful about our ability to provide for their wide-ranging needs."