Chief Inspector of Borders and Immigration John Vine found that the UKBA had allowed a backlog of 153,000 notifications from sponsors of non-EU students to build up, including whether students had enrolled on courses or were turning up for classes.
This could potentially have meant that thousands were wrongly allowed to remain in the country, he said.
The tip-offs were all reviewed by May this year, but Mr Vine said it must be an "ongoing priority" to make sure checks are carried out.
His team examined work at three UKBA offices in Sheffield, Beijing and Delhi.
The report found: "The agency had no targets in place for responding to notifications made using the Sponsor Management System.
"As a result, notifications of changes to circumstances of students, details of students failing to enrol or attend classes, or curtailment of sponsorship were not being acted upon.
"Over 150,000 notifications had accumulated and were awaiting action, meaning that potentially thousands of students had retained leave to remain when they should not have done so. This was a significant failure."
However, Mr Vine said his findings were "generally positive" and that he was "pleased" that the agency had reviewed the notifications.
He said: "I was pleased to note that in May 2012 the agency had reviewed outstanding sponsor notifications and launched an operation to identify and remove people, including students, who had overstayed beyond the term of their visa. This should be an ongoing priority rather than the subject of a one-off operation by the agency."
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