Mismanagement by the National Council for Education and Training Wales has caused "significant damage" to its reputation and that of the Welsh National Assembly, a report from the assembly's audit committee says.
The assembly this week launched a seething attack on the handling of the report, claiming that it had been deliberately leaked ahead of publication.
The report says that serious weaknesses in organisational and financial arrangements during the national council's first 12 months led to "irregular expenditure" on flawed contracts that failed to follow Welsh and European procurement rules.
The result was an "unacceptable" loss of £2.2 million and a damaging public-relations blow to the organisation.
The report also expresses "deep concern" that the national council included a gagging clause in agreements with more than 100 staff made redundant when the national council was established. The move ignored an "unambiguous" recommendation from the committee that such clauses were "entirely inappropriate in the Welsh public sector".
In a statement, the assembly accepted lessons needed to be learnt from "weaknesses of compliance and control", but added: "We think it deplorable that the report was deliberately leaked prior to publication. Its handling has diminished its credibility and damaged the audit committee process as a whole."
The national council was set up hastily by the assembly in April 2001 as the Welsh equivalent of England's Learning and Skills Council, with responsibility for all post-16 education and training.
The report says the body chose to adopt a policy of "business as usual" in the financial systems and operating procedures it had inherited from five regional Training and Enterprise Councils, rather than urgently checking that they were adequate and sound.
In an evidence session before the committee, Steve Martin, the former national council chief executive who is now chief executive of the Higher Education Funding Council for Wales, said that the organisation had had a "difficult transition period", with significant restructuring and many inherited staff with little or no public-sector experience.
He told the committee: "Had we not been overwhelmed with a vast range of things, we should and would have given more attention to managing the risk."
The auditor general reported that 21 contracts with a value of more than £2.8 million had been awarded by the national council in breach of its own procurement procedures. Some 14 of these were refused retrospective approval by the assembly, resulting in a £2.2 million loss. An investigation found no evidence of fraud, but the costs were deemed "irregular".
The report concludes: "No matter how time pressured procurement needs were, the committee considers it inexcusable that proper procedures were either not in place or were not followed."