The coalition government continued to pour millions of pounds of taxpayers’ cash into discredited security firms Serco and G4S despite the fact that the firms were under investigation for fraud.

A high-powered Commons committee has expressed amazement today that the Ministry of Justice, Ministry of Defence, Department of Health, Department for Business, Innovation and Skills and HM Revenue and Customs all continued to award the two firms work while a Serious Fraud Office inquiry was continuing.

The inquiry was launched after the discovery that the firms had overcharged the government by tens of millions of pounds for services.

Serco was revealed to have been charging fees for “tagging” and supervising released prisoners who were dead or living abroad.

The Commons public accounts committee has conducted an investigation which it said also revealed an “over-reliance” on the two firms and others who operated a monopoly of control of contracted government services.

It said government ministers had created a false impression that all business with Serco and G4S had been suspended during the fraud investigations.

The committee said in a statement: “It was not acceptable for government to give the impression that all business with Serco and G4S was halted while investigations took place, when in fact contracts were extended, new contracts were awarded and negotiations for new business continued.”

Committee chairwoman Margaret Hodge said: “Departments have taken their eye off the ball and placed too much trust in contractors and relied too much on the information contractors supply.”