Northern Ireland Water failed to properly investigate suspected fraud within its organisation, a report has found.
The Audit Office identified serious control weaknesses at the State-owned company and allegations of 'invoice slicing' were not sufficiently or rigorously pursued.
NI Water was also slow to react and did not contact the police or other public sector counter fraud specialists, but instead relied on an inexperienced internal team selected by its former chief executive, the auditor claimed.
Kieran Donnelly, the Comptroller and Auditor General, said: "I have concerns about the conclusions drawn, given the limited scope of the investigation and inadequacies in the methodology employed.
"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."
Invoice slicing is when a contractor, acting with one or more members of staff, submits bills which fall below the value requiring authorisation from a senior manager. When it occurs, payments above a certain value which should be scrutinised are not subject to that high level check.
In January 2010 NI Water launched an investigation into payments of £465,000 made to a company which held the contract for meter installation and management services. The expenditure, incurred between April 2009 and July 2009, did not have budgetary approval.
NI Water's internal auditors discovered a large number of invoices presented for payment had a financial value of £20,000 even though the weekly and, at times daily expenditure levels under the contract were often substantially larger.
One highlighted example found that on April 11 2008, seven separate invoices with a total value of £108,000 were submitted by Company E and subsequently seven separate payments were made by NI Water.
The internal probe concluded that an instruction had been given to a contractor to suppress the value of invoices to below £20,000 but concluded there were no indicators of fraudulent activity in the case.