Birkbeck College, London, is likely to be fined by the funding council after a clash over whether hundreds of students it was paid to teach have completed their studies or dropped out.
The college specialises in evening classes for mature students. The dispute centres on the faculty of continuing education, which runs more than 1,000 certificate, diploma and short courses at about 100 venues across London.
A spokesman for the Higher Education Funding Council for England said that following a routine audit visit last summer, it was "having discussions about the definition of completion by part-time students. Those discussions are ongoing."
Stephen Marston, Hefce director of institutions and projects, said: "We have a definition of completion, and where an institution is not meeting it, then there is a set of hold-back rules that follows. Birkbeck is taking very encouraging steps to make the data robust."
Tim O'Shea, master of Birkbeck College, said: "The issue is about the precise definition of completion and it affects the sector more widely. We have 1,500 continuing education students with 100 partner institutions doing very short courses. A lot of students are not going to be relaxed about doing a final exam."
Professor O'Shea highlighted the significance of continuing education to meeting the government's manifesto promise that 50 per cent of young people experienced higher education by 2010.