The Welsh first minister, Rhodri Morgan, has refused to bow to demands to sack his Liberal Democrat deputy, Mike German.

In a speech to the Welsh assembly on Tuesday, Morgan said that no minister facing unproven allegations should be required to stand aside on the basis speculation alone.

The statement followed confirmation on Monday that the Welsh Joint Education Committee is to refer papers arising from the Bentley Jennison audit report to the South Wales Police. The focus of the investigation was the management of the WJEC's European Unit between 1995 and 1996, a time when German was the unit's head.

"It would not be exaggerating to say that a tide, sometimes orchestrated, sometimes not, of innuendo, allegation and rumour have swirled around the person concerned [German], the WJEC and this Assembly in such a way that could be damaging to all three," said Morgan.

Morgan told AMs that with the police due to investigate the documents in the normal way the trial-by-media should stop. He also confirmed that a judicial inquiry into the affair had been considered, though "only briefly", but rejected in favour of a swifter police investigation.

"If the police then conclude there to be a prima facie case for formal action against that minister [German], that minister would be required to stand aside until the investigation was concluded," said Morgan.

Responding in the assembly for the Liberal Democrats, Eleanor Burnham said the issue could now be investigated by an independent body. She called for the basic principles of civil liberties to be applied to the case and told Morgan that his full cabinet should "get on with the business of governing Wales".

Earlier on Tuesday, Liberal Democrat leader Charles Kennedy had also expressed his continued confidence in German, but said it would not be appropriate for him to comment on the specific allegations.

Both Plaid Cymru and the Welsh Conservatives have called for German to resign.

Plaid's Jocelyn Davies has said her party is not in a position to comment on the truth of the allegations, but has said they "cast a sufficiently dark shadow as to make it impossible for him to continue as a member of the government of Wales".

Nick Bourne, leader of the Welsh Conservatives in the assembly, said the auditors' report raised "some very serious questions" and that German should stand down from his ministerial posts to address them

The WJEC had commissioned auditors to examine the areas of governance and financial management, credit card expenditure, travel and subsistence claims and to review the organisation's European activities.

The WJEC board of directors decided that their general framework of policies and procedures needed to be changed to address the "significant weaknesses" identified by the auditors.

The failings included the need to ensure that directors have access to professional advice in key areas of operations, the need to ensure that conflicts of interest do not arise for officers in the discharge of their duties, the lack of day to day supervision of the work of the European Unit by its head and the inappropriate use of credit cards for purchasing mobile phones, minibar and off-licence expenditure and unauthorised purchases unrelated to hospitality.