Lax controls over Europe's flagship international student exchange programme have allowed some universities to overestimate student demand for grants, according to the European Union's Court of Auditors.
Exaggerated bids have had the effect of reducing the pot of money available, meaning that universities that made more realistic assessments of demand have lost out.
In its report on the European Union's Erasmus programme, the accounting watchdog says: "Ultimately, it favours students from establishments whose projections are the least sound, to the detriment of others."
The European Commission has now tackled the problem by requiring universities to base projected numbers on the actual student numbers in previous years.
The court criticised the Socrates programmes, of which Erasmus is a part, and Youth for Europe, between 1995 and 1999. The programmes cost €998 million (£611 million) and €141 million respectively.
It also criticised delays in the roll-out of Erasmus, where institutional contracts were often not signed until almost three years after the launch of the programme, partly due to lecturers' reluctance to lose authority over Erasmus activities to more senior managers.
The court found a string of irregularities, including the payment of full grants before individual projects began and ineligible expenditure.
Despite the problems, both projects have been extended to 2006 with their budgets more than doubled, but with "tighter controls".