Metrowater, the water company of the Auckland City Council, has started an investigation into the awarding of work to a contractor.
Acting chief executive Tim Hammond said audit and forensic experts were looking into an allegation of an inappropriate relationship between a staff member and the contractor.
Mr Hammond said he was made aware of the allegation by letter on Friday.
Details have also been given to the Herald.
Mr Hammond said it was a serious and sensitive matter for the company and the individual named in the letter, and he wanted the matter resolved by Christmas.
If policies and procedures had been followed there should be no issue. If not, action would be needed.
The council has been told of the investigation.