Two of Britain's largest companies stand accused of overcharging the Government by tens of millions of pounds for electronic tagging of criminals.
Security firms G4S and Serco, who both holds contracts with the Ministry of Defence, were found to have charged for the tagging of offenders long after they stopped wearing tags.
In a small number of the cases, the subjects who were supposedly still tagged were found to have died.
The revelations have prompted a government-wide review of all contracts held by Serco and G4S.
ITV News' UK Editor Lucy Manning reports:
Justice Secretary Chris Grayling described the revelations as "indefensible" as he presented the findings of an independent audit by PricewaterhouseCoopers.
But he added that he had found no information to confirm that the overcharging had involved dishonesty on the part of either company.
Serco agreed to cooperate with a new investigation to rule out dishonesty but G4S did not, preferring to respond with the following statement:
– Ashley Almanza, G4S group chief executive
We place the highest premium on customer service and integrity and therefore take very seriously the concerns expressed by the Ministry of Justice. We are determined to deal with these issues in a prompt and appropriate manner.
G4S now faces a criminal investigation after the government reported it to the Serious Fraud Office (SFO).
Shares in both companies plunged following the news.
The government-commissioned audit showed the abuses went back to the start of the current contracts in 2005 - but could have dated as far back as 1999.
It showed that both firms charged the Government for tagging offenders long after they stopped wearing a tag because they had returned to prison or left the country.
In many cases the companies had continued billing the ministry for months, and even years, after it should have stopped.
The audit also revealed that contract managers in the Ministry of Justice discovered issues with the contract as far back as 2008 - but did nothing to tackle the problem.
The Justice Secretary said: "The House will also be surprised and disappointed to learn that staff in the Ministry of Justice were aware of a potential problem and yet did not take adequate steps to address it."
The abuses outlined today have raised questions about the suitability of private security firms to take on government contracts.
Serco and G4S were both expected to bid for future tenders as Mr Grayling looks to privatise up to 70% of the Probation Service.
Labour's shadow justice secretary Sadiq Khan called for both companies to be barred from bidding for government contracts until the matter is investigated by both police and the SFO.
Cabinet Office Minister Francis Maude will lead a cross-government review of contracts held by Serco and G4S. In a radio interview, he said there was "no evidence at the moment" of wider problems.