The council has been ordered to tell MPs what action it is to take, and how much money was lost, as the result of the collapse of Bilston Community College nearly two years ago.
David Melville, the council's chief executive, was grilled by MPs on the Public Accounts Committee who wanted to know why it had taken so long to resolve issues affecting the West Midlands college. Bilston - which owed pound;10 million - was dissolved and merged with Wulfrun College.
Professor Melville explained that Bilston, which had claimed money for ineligible courses, had had a strong principal but a weak governing body.
He said investigations were still continuing and 1,400 boxes of evidence were being held by the West Midlands fraud squad.
He added: "We are pursuing the issue of suing the auditors, (Deloitte amp; Touche) to recover lost funds, and considering suing other providers.
David Davis, who chairs the committee, objected saying: "This is not sub judice. It is not in the courts now. March is too late."
Gainsborough MP Edward Leigh was puzzled by the fluctuations in numbers of financially weak colleges, latest figures rising from 65 to 72. He complained: "There is no evidence that you are getting a grip on this."
Professor Melville said colleges lost money when they under-recruited. But colleges were now recovering more quickly than in previous years.
The council was accused of "leaving colleges in the lurch" when it changed the rules on sub-contracting courses - franchising. "You encouraged franchising. If you instructed colleges to withdraw from franchising and they lost money and they were not recompensed you left them in a hell of a situation," said Gerry Steinberg, City of Durham MP.