The Government has terminated a contract with welfare-to-work firm A4e after deciding that continuing would be “too great a risk”.
Employment minister Chris Grayling said the company's Mandatory Work Activity contract to help up to 1,000 jobless people in the South East find work was being ended.
The Department for Work and Pensions has been auditing its commercial relationships with A4e after receiving an allegation against the company earlier this year.
"While the team found no evidence of fraud, it identified significant weaknesses in A4e's internal controls on the Mandatory Work Activity contract in the South East.
"The documentation supporting payments was seriously inadequate, and in a small number the claim was erroneous. There was also a high incidence of non-compliance with other relevant guidance (including A4e's own processes).
"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 Mandatory Work Activity contract with A4e for the South East.
"Contingency plans are in place to ensure there is continuity of support for participants in the Mandatory Work Activity programme," said Mr Grayling.
A4e held the prime contract for delivery of Mandatory Work Activity in the South East, covering Hampshire, the Isle of Wight, Surrey & Sussex, Thames Valley, Bedfordshire, Buckinghamshire and Oxfordshire.
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.
A4e is keeping other contracts it has with the Department for Work and Pensions, 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 Mandatory Work Activity (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 per cent of all the other A4e claims under the contract.
It was established that 97 per cent of payments related to someone taking part in the programme, while the remaining 3 per cent were attributable to inadequate procedures rather than fraud.
Mr Grayling added: "We have made clear to A4e that we continue to require the highest standards of governance in relation to all their other contracts.
"We are reminding all our other providers of their obligations and our requirements in this regard and, should any further allegations arise, we will examine the evidence thoroughly.
"The Department will reflect on how it can further improve its processes in the light of these audits to address any remaining control risks across all contracts and providers.
"Recent coverage has also prompted complaints about service levels on past employment programmes where, unlike the Work Programme, the emphasis was on activities undertaken rather than on job outcomes.
"While this has not been part of our investigation, the Department is considering what further steps can best ensure that providers meet their minimum standards, and participants are clear about procedures for complaints."
A4e welcomed the finding that no fraud had been identified, saying that with reviews by the Welsh and Northern Ireland Assembly Governments, this means that the majority of its business has 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 findings also vindicate the hard work our 3,500 staff do - day in, day out. All over the country we're helping tens of thousands of people into training and work, knowing we have in place robust levels of quality and assurance. As a company, I recognise that we haven't got it right all of the time, but we are committed to taking responsibility for our mistakes and remedying them.
"No other provider has undergone such a thorough and forensic review of its contracts, and the positive outcome speaks for itself - this is huge reassurance for taxpayers and our customers."
A4e said that following the DWP review of its MWA contract, some specific issues were highlighted which related to a period when the company dealt with an unexpected volume of work which exceeded the anticipated monthly contract volume.
"During this time A4e's focus was for staff and service partners to ensure customers swiftly found effective work placements. However, in the same period, our administrative processes fell short of our own standards and those required by DWP, and to this end we have accepted that the MWA contract will be terminated."
A number of people have been arrested by police investigating A4e's offices in Slough, Berkshire, and are on bail until dates in late May, June and July.
Shadow work and pensions secretary Liam Byrne said: "After eight arrests at A4e, the shambles in DWP contracts is now spreading. We demanded that the Government came clean about these contracts months ago.
"Now we hear they have been forced to cancel a contract vital to helping get people back to work just as Britain has hit a double-dip recession made in Downing Street.
"The Government must now stop hiding performance information about the rest of its giant private sector contracts and publish so that Parliament can see whether public money is being well spent."
A4e still has 11 contracts with the Government, while the one which was terminated was the smallest it held.
It is understood the terminated contract was worth less than £1 million.
Prime Minister David Cameron's official spokesman said: "The DWP have issued a statement saying they are terminating a contract with A4e. The reason for that is because they have found significant weaknesses in the company's internal controls.
"That is a commercial matter for the department to deal with.
"What we are trying to do in welfare is bring in new expertise into the delivery of welfare programmes. Drawing on expertise from the private sector is one way we are seeking to do that.
"Clearly, if there are particular problems with particular contracts we will deal with that, which is what we are doing today."