More than $2 million in taxpayers' money went to a training company in a "sausage factory" rort of Victoria's regional TAFE system, which has been unravelled by the corruption watchdog.

The Independent Broad-based Anti-corruption Commission (IBAC) is considering compiling a brief of evidence for the Office of Public Prosecutions after investigating the subcontracting scam, which involved the South West and Bendigo Kangan TAFE institutes.

IBAC found the owner and director of the private training company TayTell, Rebecca Taylor, received more than $2 million in Victorian Government funding under TAFE subcontracts for training that did not take place.

Ms Taylor, her family and friends falsified enrolment forms and assessment workbooks in a process she described at the time as a "sausage factory".

Rebcca Taylor (right) falsified enrolment forms and assessment workbooks, the report said. ( ABC News )

IBAC commissioner Stephen O'Bryan said the scam flourished because the TAFEs failed to properly check the training that was supposed to be delivered on their behalf.

"The Victorian community would be right to be extremely concerned with the misappropriation of these funds," he said.

"In recent years, there has been considerable attention on the challenges confronting the vocational education and training sector, including concerns around TAFEs' financial sustainability and the vulnerability of the sector to unscrupulous providers."

South West TAFE signed a lucrative third-party agreement with TayTell in 2013 to train employees of private company Zinfra, who had no idea they were enrolled in certificates in engineering and business administration.

Ms Taylor enlisted her husband and daughter to fabricate student records "sausage-machine" style, and used the term "sausages" as code for student files in text messages.

"Ms Taylor maintained, quite absurdly, the references to 'sausages' in her text messages related to the catering to be provided at the student graduation," the report said.

In public hearings, Ms Taylor doggedly maintained the training and assessment had occurred.

"Ms Taylor's plainly false evidence became more preposterous the longer it went on," the IBAC said.

A former South West Institute of TAFE senior executive also misused his position to award training and assessment and engineering certificates to Ms Taylor when she was not qualified.

TayTell reached a similar third-party agreement with Kangan in 2014 to enrol Jetstar employees in an engineering course, but no training took place.

Enrolments were riddled with false information and forged signatures and TayTell claimed funding for ineligible interstate training, the IBAC found.

Students complained after receiving unexpected statements of attainment for study they had not done and Zinfra raised concerns with Kangan about possible fraud, but the TAFE ignored alarm bells to preserve its valuable stream of Government subsidies.

"The Kangan team managing the TayTell contract worked to downplay and discredit Zinfra's concerns, to conceal the TayTell non-compliances and to prop up and continue the training arrangement between Kangan and TayTell," the report said.

Contract a 'gift horse' in hard times

IBAC found both TAFEs failed to do the most basic due diligence or respond to red flags.

"There was a disincentive to critically monitor TayTell, Ms Taylor's company, as to do so would jeopardise funding," the report said.

"The potential value of the contract, at a time when revenue was hard to come by and highly sought after, may have marked the contract as the 'gift horse' into whose mouth no-one dared look."

Rebecca Taylor was also hired as a consultant to regional rail operator V/Line without proper procurement or recruitment processes being followed.

The corruption watchdog identified a clique of senior V/Line officers who placed undue emphasis on who people knew and personal friendships, and wilfully disregarded public sector procurement and recruitment standards between 2013 and 2016.

IBAC found a clique of senior V/Line officers disregarded public sector recruitment standards. ( AAP: Joe Castro )

"Clear conflicts of interest in procurement and recruitment were not declared or managed, allowing unfettered cronyism to flourish at senior levels of the agency," the report said.

Senior V/Line manager Alan Clifford was initially hired on an annual salary of $414,000, but by the time he left in September 2016 he was paid more than the CEO, with a salary package of $520,000.

Mr Clifford was also appointed without demonstrating he held the qualifications for the job or probity checks, after reportedly telling a colleague the certificates had been lost in a fire.

A V/Line spokeswoman said the staff were no longer employed by the company and it had strengthened the way it manages procurement, recruitment and conflicts of interest.