A specialist investigation unit should be established to probe public sector fraud in Northern Ireland, a leading watchdog has said.
The Audit Office issued the call after a second damning report in four weeks into how allegations of fraud and dubious practice were examined by a Government agency.
Its latest report criticises NI Water for not properly investigating claims about payments to one of its main contractors.
It relied on an inexperienced team selected by its former chief executive Laurence MacKenzie, the report found.
The probe examined so-called invoice slicing, where the value of individual bills are deliberately limited so they don't have to be signed off by senior bosses.
It was later found that the invoices were "sliced" on the instruction of a contract manager at NI Water.
The controversy came at the height of a troubled period for the company, which eventually led to the sacking of four non-executive directors.
An internal investigation by the body found no evidence of fraud. However, this original probe has now been discredited by the Audit Office.
Tuesday's report highlights a range of basic failings with the original investigation, including:
- NI Water was slow to react to the suspected fraud. Evidence was not secured and the suspects may have been alerted.
- The fraud team had limited experience of investigations.
- Advice was not sought from the PSNI or counter-fraud experts.
- Nor was the Audit Office informed – a serious breach of guidelines.
- Disciplinary letters sent to two members of staff contained errors which led directly to the panel's conclusion that they had no case to answer.
The company at the centre of the fraud claims is not named, however the report reveals it was receiving significant contracts from NI Water.
It was contracted to install water meters and received £3.9m from 386 invoices between April 2007 and January 2009.
An internal audit set up by Mr MacKenzie found its contract was extended by one year outside the agreed period in a potential breach of EU procurement rules.
It also found unusual patterns of invoicing by the company, with a high number of bills submitted for under £20,000.
Auditors discovered the company had been instructed to limit invoices by a NI Water manager with responsibility for awarding the contract.
He claimed to be under instruction from his line manager, however a disciplinary panel subsequently found neither had a case to answer.
Although NI Water's final report concluded there had been serious weaknesses in contract management procedures, no evidence of fraud was found.
However, the Audit Office cited a series of failings in its investigation.
It criticised NI Water for its slow reaction and starting a disciplinary process before the fraud probe was completed.
The Department for Regional Development, under whose remit NI Water falls, also failed to inform the Audit Office of the suspected fraud.
This went against guidelines and is described in the report as "a serious breach of a long established and important accountability control".
There were also serious problems with the disciplinary process.
Letters issued to the two staff members contained a factual error which the Audit Office said led directly to the disciplinary panel concluding they had no case to answer.
Tuesday's report claims the investigation was not sufficiently detailed or rigorous.
NI Water did not seek advice from the PSNI or other public sector counter-fraud experts while the investigation team appointed by Mr MacKenzie had "limited experience", the report added.
Auditor General Kieran Donnelly concluded that proper procedures were not followed.
"I have concerns about the conclusions drawn, given the limited scope of the investigation and inadequacies in the methodology employed," he said.
"While acknowledging that this investigation took place during a difficult period in NI Water's history, my view is that, on the whole, the guiding principles for the proper conduct of a fraud investigation were not followed."
It is the second time in four weeks that the Audit Office has raised concerns over how allegations are investigated.
Last month, it criticised the Department for Regional Development for a shoddy investigation into how contracts for signs were awarded by Roads Service. Tuesday's report refers to the importance of appointing auditors with suitable expertise.
"As a rule, management should not expect that internal auditors have the expertise to investigate fraud or suspected fraud," the report states.
It said organisations which do not have counter-fraud expertise in-house should seek early advice from PSNI and public sector specialists.
"We consider that there would be considerable merit in establishing a Northern Ireland public sector fraud investigation service. We understand that the Department of Finance and Personnel is considering this idea as part of its ongoing review of internal audit services in the Northern Ireland Civil Service," according to the report.
NI Water declined to comment in detail on the report's findings.
It said: "In keeping with normal protocols it is inappropriate to comment in advance of any potential Public Accounts Committee hearing and the Finance Minister's considered response.
"NI Water would note, however, that this report relates to matters which arose in early 2010 in the context of the PAC report into procurement governance in NI Water at that time.
"All relevant recommendations have already been implemented by the company."