Security firms G4S and Serco have been accused of overcharging the government tens of millions of pounds for electronic tagging services.
Senior probation officers have criticised Government's plans to involve private and charity groups in the supervision of offenders.
Frightened homeowners who react when confronted by burglars will get more protection under new plans, the Justice Secretary will announce.
Labour's shadow justice secretary Sadiq Khan has suggested that the coalition should bar G4S and Serco from bidding for future government contracts, including a tender to run the probation service.
He also called for both the police and Serious Fraud Office to investigate all of the contracts that both companies currently hold with government departments.
A statement from G4S said it believes that any evidence or indication of dishonesty should be referred to the relevant authorities including, if appropriate, the SFO.
– G4S group chief executive Ashley Almanza
G4S is committed to having close and open relationships with our customers and we strive to work in partnership for the mutual benefit of our organisations.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.
– Labour's shadow justice secretary Sadiq Khan MP
Today's revelations are truly shocking.
Given the scale of the allegations, the Government must immediately call in the police and the Serious Fraud Office to investigate both companies as fraud has potentially taken place.
There can be no cosy relationships with either company if we are to truly get to the bottom of these very serious allegations. If it was anyone else the police would be asked to investigate potential criminality. Why isn't this happening now?
A spokesperson for G4S said the firm had not been provided with the results of the initial audit of the government electronic monitoring contracts with the government, despite requesting the report.
They said an internal investigation, with external help, found no dishonesty in the tagging contracts.
Security firm Secro has confirmed it will repay any amount agreed to be owed to the Government.
Serco Group chief executive Christopher Hyman said: "Serco is a business led by our values and built on the strength of our reputation for integrity.
"These values lie at the heart of the many thousands of our people who are endeavouring to deliver the highest standard of service to our customers around the world. We are deeply concerned if we fall short of the standards expected of all of us.
"We are therefore taking this extremely seriously and will continue to work closely with our customer to resolve their concerns in this matter.
"We will not tolerate poor practice and behaviour and wherever it is found we will put it right."
Cabinet Office minister Francis Maude said Bill Crothers, the Government's chief procurement officer, will lead the review into all Government contracts held with G4S and Serco, which include running immigration centres and the welfare-to-work scheme.
Mr Maude said: "The public rightly expects government suppliers to meet the highest standards, and for taxpayers' money to be spent properly and transparently."
Electronic tagging is used as a method of monitoring offenders in the community and can be used to make sure criminals stick to court-imposed curfews.
The equipment consists of a tag fitted to the offender's ankle and a monitoring unit in the home or other place of curfew.
All movements in and out of the home, or other activities such as removal of the tag or tampering with the equipment, are reported to a control centre.
Justice Secretary Chris Grayling has told the House of Commons he is "astonished" by the revelations the government has been overcharged by "tens of millions of pounds".
– Justice Secretary Chris Grayling
This is a wholly indefensible and unacceptable state of affairs.
The House will share my astonishment that two of the Government's biggest suppliers would seek to charge in this way.
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 audit into the Government's electronic monitoring contracts with G4S and Serco found that overcharging began at least as far back as the start of the current electronic monitoring contracts in 2005 - but could have dated as far back as the previous contracts in 1999.
It also found that contract managers in the Ministry of Justice discovered some of the issues following a routine inspection in 2008 - but did nothing to tackle the problem, Justice Secretary Chris Grayling said.
Justice Secretary Chris Grayling has told the House of Commons that security firm G4S has refused to take part in an additional audit so the Government can rule out the possibility that dishonesty was involved in any of the contracts, while Serco has agreed to this demand.
Serco has agreed to withdraw from the current tender process for electronic monitoring, while the Justice Secretary is to instigate moves to exclude G4S as the company is still attempting to bid.