The Serious Fraud Office (SFO) has officially launched a criminal investigation into both G4S and Serco over their handling of the government's electronic tagging contract.
Both companies' chief executives stepped down recently following accusations of fraud and misconduct on the multi-million pound contract.
The companies have been embroiled in controversy surrounding the government's electronic contract for criminals in England and Wales, where they have been accused of overcharging the government for years.
Serco also faces possible exclusion from all current and future government contracts after it emerged that the Ministry of Justice (MoJ) asked the police to investigate alleged fraudulent activity by Serco staff.
The SFO's statement said: "The director of the Serious Fraud Office has opened a criminal investigation into G4S and Serco electronic monitoring contracts."
G4S and Serco both told Computerworld UK that they would co-operate fully with the SFO's investigation.
G4S is no stranger to controversy in the public sector, after a failure in an internal computer system was the primary reason it was not able to provide a sufficient number of security staff to support the London 2012 Olympic Games last summer.
Serco, on the other hand, is a massive business process outsourcing provider to the government and gets approximately 45 percent of its revenue from public sector contracts.
In a bid to rebuild confidence, it recently announced that it is separating its UK and European divisions into two, with one focused on its UK central government customers and the other on other public sector customers. It has also pledged to strengthen contract-level governance and transparency.
However, the allegations have impacted Serco's share price and it recently dropped out of the FTSE 100.
"It's become very clear there has been a culture within parts of Serco that has been totally unacceptable, and actions which need to be investigated by the police," the secretary of state for justice Chris Grayling said recently.
"The taxpayer must know that their money is being properly used."