Whitireia Polytechnic acknowledges it handed over nearly $250,000, which is now missing, to its student union before checking its accounts were in order.
Police are investigating the alleged misappropriation of $750,000 worth of funds at the Students' Association.
The Wellington-based polytechnic collects unions levies, along with student fees, and then passes on the levies once it sees the audited accounts.
Whitireia chief executive Don Campbell says he gave $245,000 in good faith to the union's former president, Loretta Ryder, earlier this year without seeing the accounts first so the union could remain a going concern.
Mr Campbell says at the time, he had no reason to believe there was a problem with its accounts.
However, he now admits there needs to be more checks and balances of the ways institutions deal with student union accounts.
The polytechnic has decided that it will now hold on to $70,000 worth of levies it currently owes until it sees the union's accounts.