Peter Thompson, principal of Kirkley Hall College in Northumberland, was arrested as detectives launched an inquiry into allegations of irregularities in livestock records.

Dorothy Irvine, the college’s farms secretary, was also questioned and suspended from work. Both were released on police bail. Northumbria Police refused to disclose the extent of the alleged fraud, but said “a large sum” was involved. The inquiry is understood to centre on the recording of movements of cattle.

Detectives are examining college accounts to try to discover how far back the alleged offences date and to pin down the sums involved.

Kirkley Hall College, where Mr Thompson has been principal for 10 years, runs two lowland farms breeding dairy cows and sheep and has a small herd of beef cattle.

The farms are managed by a company which is part of the college corporation. A total of 203 full-time and 1,000 part-time student take courses in agricultural and environmental subjects, machinery and estate, horticulture and adult education.

College vice-chairman of governors Charles Beaumont described the incident as “most regrettable, particularly in the light of the college’s recent progress with student enrolment at its highest level ever”.

Staff had been praised in a recent Further Education Funding Council inspection report, he added, and would continue to maintain their “excellent record in teaching and support”.

Following Mr Thompson’s suspension, vice-principal Keith Hoskins has taken over as acting principal. Mr Beaumont took the decision to suspend Mr Thompson, as chairman of governors Alan Jackson is on holiday.

The vice-chairman said: “The governing body has every confidence that Keith Hoskins and his staff will maintain the smooth running of the college.”

The college is carrying out its own inquiry. Police inquiries are likely to continue into December.