Chair Trevor Phillips has met with the home secretary. Photograph: David Levene
The Equality and Human Rights Commission was warned today that the government will not tolerate continued waste of taxpayers' money, as auditors identified irregular expenditure for the second year running.
The National Audit Office said it was unable to approve the EHRC's annual accounts, because of "serious failings" in the way it had procured contracts.
The NAO's warning comes as the government makes plans for a radical reshaping of the body, which is to become "smaller and more tightly focused".
The home secretary Theresa May, said: "The EHRC has a track record of not being careful enough with taxpayers' money, and these accounts show that problems there persist. Failure to deliver will not be tolerated by this government – we will look at further sanctions if the problems highlighted by the auditors are not dealt with."
She said: "The government is totally committed to creating a more equal society for everyone, but we're also committed to cracking down on waste and failure."
The EHRC has already been fined £508,000 – in the form of reductions to its grant – to compensate for excessive pay rises granted to staff that went beyond government-agreed maximum limits, the NAO report said. It was fined a further £200,000 last month after failing to meet a deadline to produce guidelines on how to implement the Equalities Act, forcing the government's Equalities Office to pay another body to produce the guidance.
The NAO said that the commission's spending practices had begun to improve, but warned that a number of the weaknesses highlighted in the report were "deep seated and longstanding", and said it was "likely that these problems may have continued beyong 2008-09", the year that the accounts cover.
Neil Kinghan, director-general of the EHRC, said that since 2009 a new finance director had been appointed, and stronger accountability mechanisms had been put in place. "I regret that the commission made mistakes in its first 18 months, and accept the NAO's decision to qualify our accounts as a result," he said.
A letter sent by the home secretary last week to the commissions chair, Trevor Phillips , following a private meeting to discuss the body's accounts, appears to confirm that the EHRC will survive the quango cull, but indicates that the organisation will be reformed and streamlined.
In the light of the structural changes expected to be announced in late autumn, May asked Phillips to halt interviews for a new chief executive, a post which has remained unfilled for the past year.
"We agreed that the commission is about to enter a period of significant change from which it is likely to emerge smaller and more tightly focussed," May wrote in the letter, seen by the Guardian. "The recruitment process should be halted, and a new process launched once we have a clearer idea about what the reformed organisation will look like."
The EHRC's budget has already been cut by £7m, to £53m, but officials expect further, deeper cuts. Staff numbers will be cut from 525 to a maximum of 400, and will probably go lower than that, a source said.
The body is undergoing an internal review, aimed at establishing which of the different strands of equality (race, gender, age, sexual orientation, belief, disability, transgender status) should be prioritised, and has commissioned research to assess which of those issues are most pressing, and where least progress is being made. Its conclusions will influence the commission's
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