Somerset County Council is facing an unexpected bill of nearly £3m after discovering a bus subsidy deal made in 2008 was "very poor value".
The Conservative-led council confirmed, at a cabinet meeting on Wednesday, that the "overspend" is owed.
Inquiries are under way on whether the authority will have to pay the money.
A spokesman for the council said: "The council can confirm that an agreement was made with a bus operator that was very poor value for this council."
The agreement was made in 2008, when the authority was led by the Liberal Democrats.
The Conservatives took control of the council in 2009 but the problem with the subsidy contract has only recently been discovered.
Two months ago the manager of the department, Transporting Somerset, which is responsible for handing out contracts to bus companies, resigned.
The new Lib-Dem leader, Sam Crabb, said: "We have no idea of how that loss occurred and despite questions no information was forthcoming.
"My fear is that there is total mismanagement as well as loss from within this department at the council."
The council spokesman said he could not go into detail about the bus contract for legal reasons, but discussions are taking place on the matter.
The Transporting Somerset department has to save £3.7m over the next three years as a result of the the government's Spending Review, which reduced the council's budget.
The authority has made major cuts to subsidies which have resulted in the majority of evening and weekend bus services being scrapped.