The principal and financial director of Cricklade College in Andover, Hampshire, have been suspended and police are investigating claims made on the European Social Fund.
The college has also received a damning report from the Further Education Funding Council. It states: "The governance of the college is weak. The corporation does not substantially conduct its business in accordance with the instrument and articles of government. It has not substantially fulfilled its responsibilities under the financial memorandum with the FEFC."
The police inquiry is into a trading agreement between the college and a private training organisation in 1994-95 to provide IT training. The police were called in after the ESF carried out a verification visit in 1996. Police are a long way from concluding their investigation.
The college principal Richard Evans became ill in January of this year and went on sick leave. Elizabeth Blakemore, the acting principal, said this week: "To conduct our own independent inquiry we suspended the principal in March. This was necessary to undertake an independent and impartial audit."
At the end of last August Mike Clarke retired as financial director but he returned soon after as the part-time clerk to the corporation. Ms Blakemore confirmed that he was suspended by the college, and he subsequently resigned.
The FEFC identified weak financial management. Between July 1995 and July 1997, the reserves declined from a surplus of pound;700,000 to a deficit of pound;1 million.
"During the same period, the ratio of the college's current assets to current liabilities has reversed from 3.5:1 to 1:3.5. The rapid decline raises concerns as to whether the governors had sufficient financial information to allow them to fulfil their duties in ensuring the solvency of the college."
The members of the corporation believed that the poor financial position of the college has been partly caused by a problem relating to the conversion of enrolments into funding units. Serious errors in entering course file data onto the computerised information system have led to substantial financial clawback by the FEFC.
The college commissioned a detailed review of the controls on the student record system by its internal auditors. "There is no evidence that the warnings given during the last inspection about inaccurate data, which put into doubt enrolment, achievement, and retention figures, were heeded or acted upon by members. There have also been a number of activities undertaken by the college, approved by the corporation, which have contributed to the current position, and endangered the solvency of the college," says the report.
Further criticisms were that the clerking of the corporation was "poor" with a lack of awareness of current best practice relating to governance, it was difficult to establish from minutes when or how decisions were made, and a misunderstanding of quoracy rules led to one inquorate meeting.
"Governors give little time in their meetings to academic matters. Members acknowledge that they have had too little involvement in the academic life of the college... Minutes show that data on students' achievements are received annually by the board but there are no records of debate or analysis or evidence that members form an accurate view of the standards achieved by students."
Ms Blakemore said the college recognised that the FEFC had made some tough observations. "There are lessons to be learned but we are severely constrained. We are well on course to ensure we make a positive response."
A spokesman for Natfhe, the lecturers' union, said the problems related to underfunding combined with a lack of accountability, exacerbated by autocratic management and poor governance.
"FE is in a state of crisis as a result of underfunding and the freedom given to managers and governors to avoid public scrutiny and accountability. We wish to avoid giving the impression this is an isolated case, and hence to avoid unnecessary and unfair damage to the staff and students of Cricklade."