Train to Gain's budget-busting growth has been accelerated by providers offering "inappropriate" cash incentives for employers to join the programme.
The Learning and Skills Council was forced to warn providers that they should not pay employers to take the free, work-based training for staff after it uncovered the practices earlier this year.
Colleges and training providers which have seen next year's budgets slashed because of the overspend have reacted with outrage over some employers being paid to sign up to an oversubscribed scheme.
Maurice Patterson, director of finance at Thomas Rotherham College, South Yorkshire, said his Train to Gain budget was set to fall by 47 per cent. The LSC has said it would not be able to fund any new starts on the scheme until next April.
Mr Patterson said: "We are asking, where has the money gone? My suspicion is that a lot of it is going to private training providers who may be cheating the system. We know a lot of organisations have gone right over their targets. They have been using the system, and it is colleges that have played by the rules and been clobbered."
The LSC's guidance specifically mentions independent providers, but it is not clear whether the bodies responsible for inappropriate payments were private companies. The council's briefing note was issued to all types of provider.
Julian Gravatt, associate chief executive of the Association of Colleges, said several factors had contributed to the sudden rise in Train to Gain recruitment, including increased flexibility to reskill people with level 2 qualifications.
But he said: "No one has a proper explanation for the surge in Train to Gain enrolments in the last months of 2008 and the first few months of 2009. Various theories have been advanced, but the full story isn't out.
"Without any explanations, it is unsurprising that rumours spread about the impact that inappropriate practices have on budgets."
Cash incentives were just one of the measures used to boost take-up of Train to Gain that were banned by the LSC. Providers have been caught creating jobs so that students can take advantage of the free training, by either putting them on very short contracts or on "zero hours" contracts with no real work.
The LSC found providers were also creating volunteering opportunities to boost Train to Gain enrolment. Unpaid volunteers are eligible for the scheme, but the LSC is issuing guidance to prevent volunteer places being created to take advantage of public funds for training.
The LSC did not provide figures on the extent of the misuse of funds, but sought to downplay the incidents uncovered so far. Kirsty Evans, its skills development director, said: "We are not aware of any widespread practice. However, any provider that we are alerted to who has been inappropriately using Train to Gain funding will be investigated . No LSC funds should be used as inducements to secure business."
Analysis, page 4.