European funding could be at risk after a government audit uncovered “potentially” £40m-worth of errors over money dished out by the Skills Funding Agency, FE Week understands.

The situation was described as “significant and potentially damaging” to the reputation of the UK government and the agency, according to correspondence leaked to FE Week.

Errors were said to have been recorded against more than 25 providers in a sample audit of applications for European Social Fund (ESF) money.

More than 80 per cent of the errors relate to just five of the providers.

“The collective error from this, of more than 7 per cent, represents a potential £40m error, of which the agency must cover £20m,” according to the agency correspondence.

“This is therefore a significant issue and might lead to a suspension of payments to the UK and damage to the UK government’s and agency’s reputations.”

It is understood a number of errors were clerical and agency officials have been told to go back to providers before a final audit report is produced.

“We may have an opportunity to affect the final report, and reduce the impact, by finding further evidence at these providers and reducing their errors if this is done quickly,” it is added in the correspondence.

And an agency spokesperson said it would take action against providers who could not “produce the necessary evidence and paperwork to support an ESF claim for funding”.

The audit on agency ESF spending by the Department for Work and Pensions (DWP), which has overall responsibility for managing England’s pot of ESF cash, took place last year.

Allocations from the ESF, according to the DWP website, are “based on regional employment and skills needs — for example, the numbers of people not in work and who do not have good qualifications”.

The current ESF programme covers a five-year period from 2007.

It is distributed through public agencies such as the agency, the DWP itself and the National Offender Management Service.

The agency match-funds ESF money, from the European Commission, at 25 per cent and would therefore be responsible for, FE Week understands, £10m of the possible overall error.

An agency spokesperson said: “The programme, like all programmes, is subject to a cycle of regular and routine auditing.

“These audits ensure providers have the necessary controls and evidence in place to support claims made for funding.

“The ESF programme is also audited by the DWP on behalf of the European Commission.

“If as part of one of these audits a provider cannot produce the necessary evidence and paperwork to support an ESF claim for funding, the agency will take action to recover those funds as part of our routine controls and procedures.”