An alarming lack of audit controls has been exposed at Australia's leading Indigenous funding organisation.

A new report by the Australian National Audit Office has found the National Indigenous Australians Agency, the Commonwealth body responsible for policy development, implementation and service delivery for First Nations people, is failing to properly detect and manage fraud.

The agency, which has more than 1300 employees across Australia, had its budget in 2022-23 increased to $4.5 billion, to provide funding for programs through the Federal Government's Indigenous Advancement Strategy.

In 2021–22, the NIAA spent $1.03 billion on more than 1000 external providers to deliver IAS activities and services, yet it failed to initiate a single fraud investigation.

ANAO analysis of Australian government entities in June 2022 found the average number of external fraud investigations in medium agencies was 25 and in large agencies 12.

Its report said the NIAA was not meeting legislated requirements for "risk and fraud management" in its role coordinating service delivery and policies for First Nations people.

The inadequacies in its fraud management were enough for Indigenous Australians federal minister Linda Burney to instruct the NIAA to implement further anti-fraud measures, in addition to seven recommendations from the ANAO in its report.

"I am very disappointed and concerned by the ANAO's findings," Ms Burney told National Indigenous Times.

The NIAA was designed to improve Indigenous communities through the delivery of services but lacked proper oversight and compliance mechanisms to ensure funds were directed appropriately.

One area of concern for the ANAO was the NIAA's management of fraud and non-compliance risks with service providers.

"Its frameworks for managing provider fraud and non-compliance are not fully fit-for-purpose," the report said.

Ms Burney said the systems put in place by the previous federal government were "clearly deficient".

"Strong governance and accountability are critical to ensuring delivery of high quality services and better outcomes for Aboriginal and Torres Strait Islander communities," she said.

"The NIAA has already agreed to all the recommendations by the Auditor-General, and is in the process of implementing them."

Ms Burney said she had also instructed the NIAA to: Establish an Integrity Group to elevate fraud prevention and detection; Introduce a program of pro-active random compliance checks that is best-practice; Start additional training for staff on fraud prevention and detection; and ensure staff are taking preventative and proactive steps to prevent and detect fraud

In a letter to Auditor-General Grant Hehir in May addressing the ANAO's report, NIAA chief executive Jody Broun said the agency would implement all seven recommendations and meet its obligations under Commonwealth legislation.

"The opportunities for improvement identified in the audit report, in conjunction with the work already under way to enhance practices and processes, support the agency's continuous improvement of its management of risk, provider fraud and non-compliance," she wrote.

An ANAO review of five investigation closure reports by the NIAA found there was no or insufficient evidence of fraud in all five, however the ANAO identified that of the five reports provided: three closure reports were not approved; one closure report was not dated; of the four closure reports that were dated, three were not endorsed by case officers; and three closure reports did not include information on lessons learned.

Between July 2020 and December 2022, no fraud investigation performance measures were tracked, reported or reviewed.