The Yorkshire Post can also reveal BT fears there are other potential failures of control across its entire communications contract with the MoD, which is costing the public purse £3bn and is described as vital to the daily operations of the armed services.

Shadow Defence Secretary Dr Liam Fox last night criticised the MoD for lax financial controls – particularly when the defence budget is already so stretched.

He said: "In an era of constrained defence spending the MoD has a responsibility to ensure they are getting good value for money. Every penny counts when it comes to equipping our frontline troops.

"Mechanisms must be in place to prevent incidents like this one from happening in the future. Obviously, with this BT contract, there was no system in place. Consequently, the MoD was scammed."

The fraud involved BT staff making what the company previously described in internal communications obtained by the Yorkshire Post as millions of false calls to meet targets under the Defence Fixed Telecommunications System (DFTS) contract.

A company briefing prepared for the MoD last autumn, obtained under the Freedom of Information Act, now says BT identified 1.25m fraudulent calls between May 1999 and February 2005 from four call centres across the country, including one at Wakefield.

Other documents confirm BT has paid the MoD £1.75m as a settlement for the fraud made up of £1.2m for the cost of the fake calls plus associated costs for the MoD's own investigation and a refund of interest on the over-payments.

The briefing also raises concerns about the failure of the company to properly investigate the fraud, following a tip-off by an informant to the MoD Police in 2004, saying "…there was a culture to wish to draw a line under the issue".

It has been previously revealed that BT only launched a rigorous investigation over a year later when a second informant came forward – by which time the fraud had been running for six years.

The DFTS contract, begun in 1997, was the largest private finance initiative approved by the Government at the time. Despite the discovery of the fraud, the MoD decided to extend its life in 2005 by another five years – a contract extension worth £1.5bn, taking the total cost to £3bn.

At the time, Lord Bach, Minister for Defence Procurement, said: "The extended contract will secure the continuation of voice, data and video telecommunications which are vital to the daily operations of the Department and the UK's Armed Forces... and improve the ability of the Department to ensure ongoing value for money."

But the BT briefing reveals company auditors have raised a raft of concerns about the company's management of the whole contract, as well as highlighting specific failures relating to the four call centres set up to manage calls at military bases.

In relation to the calls centres, it notes that no evidence on quality checks existed and that it was impossible to confirm who was responsible for the task "as the evidence had been destroyed".

"Action points" raised during management meetings were not shown as being carried out, with no subsequent reason provided. In the context of the fraud, it highlights: "As an example, abnormally high call volumes were noted with an action point for this to be investigated, the result of which was not recorded."

The briefing found that back-up data systems were inadequate, adding that it was "unacceptable for systems on a major contract to be unsupported..."

The company's ability to manage the entire £3bn contract is also called into question with the briefing quoting from an internal audit report which said: "We are concerned that the level of risk management over the DFTS contract is inadequate. Together with the lack of a robust control framework little assurance can be provided that all potential risks have been identified and adequate controls are in place to facilitate the smooth delivery of the contract."

The briefing further adds that the contract had not been subject to "the appropriate level of oversight by BT management."

It also says the level of concern meant that the company needed " to establish whether similar weaknesses exist in other major contracts."

BT issued a statement which said: "The issue is now closed and the commercial and financial settlement has been concluded. We and the MoD are satisfied that the matter has been addressed in a comprehensive and professional manner."

An MoD spokesperson said: "The MoD and BT have completed a full and detailed review of the scale and value of the reparation payments – these payments cover not only the specific financial losses incurred but also the costs to the Department of the time and detailed work involved in this protracted investigation.

"Importantly BT has put in robust management controls to ensure that this cannot reoccur and we continue to value our long-held excellent partnering arrangements. BT has been open and cooperative at all times, working alongside the MoD audit process to ensure that the systemic weaknesses identified are fully rectified."