Up to 181,000 migrants who should have gone home over the past two years alone could still be in the UK illegally, figures showed today.
The UK Border Agency estimate showed it does not do enough work to check that migrants leave the UK if they have no right to remain, the National Audit Office said.
But Immigration Minister Damian Green said the report showed exactly why radical reforms to the UK's immigration system were needed.
The auditors found migrants and employers could exploit the points-based system for visas because the UKBA has failed to check the risks posed by key features of the process.
They called for the UKBA to "give greater priority to ensuring that migrants leave when they should" and said it should set national targets to tackle those who overstay their visas.
"The agency estimates there may be up to 181,000 migrants in the UK of all visa types whose permission to remain has expired since December 2008," the NAO said.
It added that the UKBA "lacks the ability to easily identify individuals whose visas have expired".
Margaret Hodge, chairwoman of the Committee of Public Accounts, said that after the UKBA refuses extensions to visas, "it cannot guarantee that these people actually leave the country".
"The agency relies on employers to police their own employees and does not carry out its own checks," she said.
"There could be as many as 181,000 people here on expired visas."
While the points-based system was "a welcome simplification" of the old system which had 39 types of work visa, Ms Hodge said "gaps in data, poor risk management and inefficient processes mean that we cannot be certain that it either ensures proper controls or meets the UK's need for skilled labour".
But Mr Green said radical reforms were already being introduced, including "the introduction of an annual limit on economic migrants, sweeping changes to the student visa system, and a shake-up of the family and settlement route".
"We are also committed to reintroducing exit checks by 2015," he said.
"Counting people in and out of the country will give us better control over those that overstay.
"We are determined to reduce net migration to the tens of thousands, and clamp down on immigration abuses."
The NAO report also found that the UKBA "has not evaluated the risks associated with some inherent features of the system which could be exploited by employers and migrants", to the detriment of British workers.
It added the agency "cannot provide assurance that it is managing the risk of non-compliance by migrants and sponsors with immigration rules effectively".
The report also found the UKBA cannot verify that employers have first checked whether any British workers are suitable for positions at the point at which a migrant applies for a visa and "has not assessed the overall risk that relying on supporting documentation poses to proper control".
One in three employers also wanted to recruit more skilled foreign workers than they were able to and one in five would pay extra to get better customer service, the NAO said.
Half of all staff said they found it difficult to check that supporting documents were valid, but had no discretion to refuse an application unless they could prove the documents were fake.
While the UKBA claimed 96% of its 22,000 sponsoring employers fulfilled their duties, only 15% were visited and the agency "does not know how many it has yet to visit or the proportion of its visits which identify compliance issues", the NAO said.
It added that the agency was also "hampered by poor information systems", causing delays and extra costs.
The NAO report also found the UKBA had paid £4 million to the IT firm Fujitsu in 2007 for applications which were never used.
Amyas Morse, the head of the NAO, said: "The UK Border Agency's points-based system is not yet delivering its full potential for value for money.
"While it is well designed and adaptable, the underlying systems and management information are in need of improvement.
"Customer services do not meet customer expectations and the agency cannot easily identify and follow up individuals whose visas have expired.
"Implementing the radical changes planned for the system in 2011-12 will enable the agency to reconsider its priorities and improve customer service and its assurance over control systems."