Ministers have been accused of leaving "glaring holes" in fraud controls on welfare-to-work firm A4e as one of its contracts was axed.
The National Audit Office (NAO) said vital evidence was missed in risk assessments of the company, which holds government contracts worth more than £70 million a year.
The Department for Work and Pensions (DWP) did not request internal audit reports, including a paper highlighting nine cases of possible fraud and seven of improper practice by A4e staff.
The findings emerged after it was announced that the company's Mandatory Work Activity (MWA) contract to help up to 1,000 jobless people in the South East find work was being ended.
Employment minister Chris Grayling said a review by the DWP had not uncovered any fraud, but did identify "significant weaknesses in A4e's internal controls".
"The documentation supporting payments was seriously inadequate, and in a small number the claim was erroneous," Mr Grayling said.
"The process established prior to March fell significantly short of our expectations. As a result, the Department has concluded that continuing with this contract presents too great a risk and we have terminated the MWA contract with A4e for the South East."
The programme is aimed at helping jobseeker's allowance claimants identified as most in need of support. Participation is mandatory, with sanctions against those who fail to take part, or complete a placement.
It is understood the cancelled deal was worth less than £1m, and A4e retains its other contracts, including those under the Work Programme, which tackles long-term unemployment.
The original allegation against the company suggested that A4e employees may have claimed payments for MWA claimants who had not been placed in work.
Investigations were held into every MWA claim from the office in Epsom, Surrey, where the allegation was centred, as well as 20% of all the other A4e claims under the contract.
It was established that 97% of payments related to someone taking part in the programme, while the remaining 3% were attributable to inadequate procedures rather than fraud.
A4e welcomed the finding that no fraud had been identified, saying that with reviews by the Welsh and Northern Ireland Assembly governments, the majority of its business had been fully examined by external auditors.
Chief executive Andrew Dutton said: "These findings demonstrate what I have always maintained to be true - that there is no place for fraud at A4e - and make it clear that A4e has strong controls around its flagship contract, the Work Programme.
"Our immediate task is to further enhance our controls to cement our position as a trusted provider of front line public services."
The NAO said reported fraud across all contracted provider employment programmes was "relatively low", with 126 reported cases investigated since 2006.
The DWP established that "false representation", or fraud, took place 24 times, with the total estimated loss over six years coming to £773,000.
Nine of those cases were referred to the police.
There were 45 cases in which the DWP found there was a case to answer, divided between 37 providers. Only five providers had more than one case to answer.
Most of the allegations related to the New Deal and none have been reported in relation to the Work Programme, which replaced it in 2011.
Margaret Hodge, chairman of the Public Accounts Committee, said she was "truly shocked" by the "glaring holes" in the government's prevention of fraud.
"The department knew that fraud was a problem, but missed looking at the obvious sources of evidence. They didn't even look at the internal audit reports which point to the real risk of systematic fraud and bad practice in A4e," the Labour MP said.
"The department omitted key controls and left the New Deal programme open to abuse and, while they have learnt some lessons, they have not done enough to minimise fraud risk in the Work Programme.
"I am also appalled by the lack of care taken by the department and providers to cut out bad practice which has provided a poor and sometimes negligent service to the public."
But Mr Grayling said the government had learned the lessons of the New Deal which "lacked strong enough controls".
"Our providers are required to have stringent controls to guard against fraud, and we have a thorough system of checks covering every provider in every contract," he added.
"When providers fall below the standards of governance we require we will take appropriate action - that is why we have terminated our Mandatory Work Activity contract with A4e and will consider what else we can do to address any remaining risks."