It said the Polish crew of the Celtic Pride, which was travelling from Swansea to Cork, lacked the expertise to identify the hazard.
The report, from the Irish Department of the Marine, describes the deaths of Catherine Tomlins, 15, and her brother James, 12, last August, as an accident waiting to happen and highlights the lack of international standards for ships' sewage systems.
The children were found dead in their cabin when the ferry arrived in Cork. A post-mortem examination revealed that they died after inhaling hydrogen sulphide. Their younger brother escaped the tragedy after going to their parents' cabin earlier in the night because he could not sleep.
Investigators found that sections of piping integral to the forward sewage treatment tank close to the children's cabin were missing. A ventilation slot between sections of the tank was blocked by a pair of jeans, while the air lift systems necessary to the onward disposal of sewage were 'blocked solidly with sludge, indicating they had not operated for some time'.
The investigators said the ferry's officers knew of problems with the sewage system but had not made themselves aware of the possible fatal consequences of sewage gases escaping into cabins.
There had been 34 separate complaints from passengers about foul smells. One complaint from a consultant engineer three weeks before the accident had identified the gas as hydrogen sulphide. But the officers failed to note this complaint in the ship's log.Reuse content