Colleges are receiving millions of pounds in funding that they are not entitled to by submitting inaccurate data.
An audit of around a quarter of England's colleges uncovered issues including institutions claiming cash more than once for the same student and being unable to prove the existence of some learners.
The research found that a total of pound;2.6 million had been obtained in 200910 due to incorrect data submissions, amounting to more than pound;29,000 per college.
The Association of Colleges (AoC) has backed the recommendation of the Wolf review, published last week, that the "complex and completely opaque" FE funding system be reformed and simplified.
The errors were found in the individualised learner record (ILR) returns for students, during the audit carried out jointly by the Skills Funding Agency (SFA) and the Young People's Learning Agency.
Common mistakes included colleges claiming for students' previously attained qualifications and failing to adequately monitor sub-contracted provision.
An SFA report on the audit said: "Some providers did not hold original documentation or adequate evidence to support learner existence, including attendance, or eligibility."
The report also said inconsistent start and end dates for courses had been uncovered, adding: "The funding auditors observed examples of inconsistencies in documentation, enrolment formslearning agreements and attendance registers, and between documentation and dates recorded on the ILR."
Some attendance registers were found to be missing or incomplete.
There were also problems with "nested qualifications", where students taking longer courses switch to shorter ones.
The audit found that registers combining multiple learning aims made it difficult for auditors to calculate the number of guided learning hours students had received.
Other issues included colleges wrongly claiming funding for overseas learners, fee remission and learners' qualifications for which there was no proof of completion.
The report criticised some colleges for failing to use the provider data self-assessment toolkit, which would have identified funding problems at an earlier stage.
"Some providers did not hold appropriate or sufficient evidence in their enrolment formlearning agreement to confirm that each learner was eligible for agency funding," the report said.
"In addition, a number of enrolment formslearning agreements were incomplete andor had not been signed by the learner or on behalf of the provider."
AoC assistant chief executive Julian Gravatt backed the Wolf review's call for the funding system to be made simpler.
"There are some areas where improvements are needed," he said. "An important point is that it relies on colleges complying with funding rules, and these are very complicated."
In her review of 14-19 vocational education published last week, Professor Alison Wolf wrote: "It is hard to believe that we alone need to maintain a system of such complexity that senior college staff must attend annual fee-bearing courses to understand - partially - how they are being funded, and receive tips on how best to play the system."
An SFA spokeswoman said there was a "very low level of data errors", amounting to less than 1 per cent of the funding provided, and added that overpaid funding has been recovered.