Emma Harrison was given her high-profile role as David Cameron's adviser on workless families after the Government had been privately warned of alleged fraud within her firm, A4e.
The allegation yesterday cast renewed doubt on David Cameron's judgement in his choice of advisers.
The Prime Minister ran into heavy criticism last year over his decision to employ the former News of the World editor Andy Coulson as his personal spin doctor. Mr Coulson has been arrested by police investigating the phone-hacking allegations.
A4e's website yesterday revealed that the Department for Work and Pensions (DWP) was tipped off within 48 hours of fraud allegations being uncovered in November 2010.
Yet in a speech on 10 December, Mr Cameron said he had personally asked Ms Harrison to "come on board".
Last April, the DWP announced that A4e, which specialises in finding work for the unemployed, had been awarded contracts worth millions of pounds.
Yesterday, the Work and Pensions Secretary, Iain Duncan Smith, came under pressure to say when he knew that there were fraud allegations.
His Labour shadow, Liam Byrne, wrote Mr Duncan Smith an open letter saying: "Given that your department knew about the allegations, they go to the issue of the Government's judgement in how it dealt with them."
Last week Ms Harrison, who paid herself a dividend of £8.6m last year after her company's turnover rose to £234m, resigned from her role as a Downing Street adviser and relinquished her role as company chairman, because of the intense "media focus". Yesterday, she strongly denied any wrongdoing over reports in a Sunday newspaper that she received £1.7m from leasing out properties to her welfare-to-work business. In a statement she said both her family's finances and those of her companies were "legal, above board, open and transparent".
The DWP said last night: "We have been clear that if there is any evidence of systematic fraud at A4e... we will terminate existing contracts.
"We welcome A4e's decision to have a full independent audit. These cases all relate to previous back-to-work schemes. None of these apply to the work programme."Reuse content