A secret report into taxpayer subsidies to encourage research and development spending found the rules governing the scheme were "ambiguous" and "contradict the purpose".
According to Callaghan Innovation's most recent annual review, 85 firms received $135 million under the scheme in the year to June 30. The scheme allows firms to claim 20 per cent of their research and development costs, up to $5 million a year.
The report by Deloitte emerged out of a dispute between government agency Callaghan Innovation and media firm Trends Publishing that has resulted in High Court challenges and a Serious Fraud Office (SFO) investigation.
Callaghan complained to the SFO that Trends had claimed more than they were entitled to and launched legal action to reclaim $382,912.
Trends directors reject any suggestion of wrongdoing and say Callaghan acted unfairly, particularly in unilaterally issuing a press release about its complaint to the SFO.
Trends director of special planning Andrew Johnson said Deloitte had been engaged by Callaghan to look into his company at the end of last year, but the funding agency had refused to release an unredacted version of the report.
Johnson provided the Herald with copies of emails where Callaghan staff said in February the section criticising the growth grants scheme was excluded from release under the Official Information Act as it was claimed it related only to "administrative matters between Deloitte and Callaghan Innovation".
However, in subsequent court action an unredacted version of the report was released independently by Deloitte.
"Throughout this review and assessment of the eligibility of R&D expenditure we found the terms in the funding agreement to be ambiguous and to a certain extent contradict the purpose of the grant," the report said.
According to Deloitte, the terms disallowed capitalising expenses, effectively prohibiting subsidies for development spending.
"The terms of the funding agreement specially prohibit a recipient claiming any development expenditure and only allow for research expenditure to be claimed," it said.
In light of these criticisms, Deloitte called for the funding agreements to be reviewed and amended.
Johnson said Deloitte's criticism of the scheme backed up the company's complaints that the funding contract was ambiguous.
"The independent audit discovered flaws in the funding agreement: And they removed it. That's the biggest issue.
"They removed the flaws that we were constantly trying to point out," he said.
David Johnson, owner of Trends and father of Andrew, said he never intended to be a whistleblower.
"We don't want to be crusaders on this. We just want to clear our name."
In a written statement, Callaghan, which last year received $212 million in government funding, declined to address the concerns raised by the Deloitte report or why it had been earlier withheld.
A spokesman said as the dispute was before the courts - with a hearing today at the Auckland High Court - "we are unable to comment on any of the questions around the report".
Callaghan did not say whether recommendations from Deloitte to review and amend contracts with grantees had been followed through, but did say clawback action had begun against two other companies that had received funding.
The spokesman was unwilling to give any details of this previously unreported clawback action.
Science and Innovation Minister Steven Joyce, in a written statement, backed the funding agency.
"I do have confidence in the delivery of the growth grants programme," he said.
"These matters should be dealt with by the court. I won't be making any further comment on this case until it is concluded."
A spokeswoman for the Serious Fraud Office confirmed the investigation into Trends was still active.
Despite the first complaint having been made nearly 12 months ago, the spokeswoman was unwilling to give an indication as to when a decision on whether to charge would be made.
• Provides grants to encourage research and development.
• 85 firms received $135 million under the scheme in the year to June 30.
• Firms can claim 20 per cent of spending on R&D costs, up to $5 million a year.