The report claims Penney and the Waratahs reached a settlement agreement for the early termination of his contract.
"This is devastating news for him," NSW Rugby chief executive Paul Doorn said.
"To his credit, in many ways based off conversations we've had previously leading up to this point, it wasn't a dramatic surprise.
"He is bitterly disappointed that he can't continue to fight with the squad he has. He appreciates the organisation's rationale for making the decisions that are made."
Doorn said in a club statement confirming the contract termination: "The decision to part ways with Penney was not taken lightly.
"Being the coach of the NSW Waratahs is one of the most high-profile and high-pressure roles in Australian rugby.
"Rob is extremely professional and has put a great deal of effort into the role. However, the on-field performances this season have not met expectations and we feel that, in the best interests of the Waratahs, now is the time to make a change."
Doorn and the club's high performance committee, made up of members of the board of directors, made the cold decision on Sunday morning and passed on the information to Penney straight away.
NSW assistant coaches Chris Whitaker and Jason Gilmore have been named interim coaches for the rest of the season.
The Waratahs will now commence and extensive coach recruitment campaign to have a new mentor in place for the start of the 2022 pre-season.
