In a further blow, Serco has reported a 3.1pc fall in pre-tax profits to £106.1m for the first half of the year. Revenues jumped 10.4pc to £2.1bn, helped by a record amount of work won in 2012. However, operating margins fell 23 basis points to 5.7pc due to increased investment in bidding for new work.
Serco has an order book of £18.5bn at the end of June, slightly down from £19.1bn six months earlier.
The prison contract probe comes after it emerged in July that Serco and its competitor G4S had overcharged the taxpayer by tens of millions of pounds for electronic tagging of criminals.
Michael Hewson, senior market analyst at CMC Markets, said: "[The latest allegations have] raised the prospect that the company could struggle to shake off any reputational damage both scandals have done to the company's brand. There is also the concern that the company could well lose revenue if the UK government decides to reallocate the contract."
After it emerged that some of Serco's employees had falsified documents to make it look like prisoners had been delivered to court on time, the company has agreed to be supervised by Ministry of Justice (MoJ) administrators while it fulfils the contract. The company is also overhauling management, strengthening internal audits and opening itself up to more intense scrutiny by the Government.
Serco has agreed to repay all past profits made on the contract since it was renewed in 2011, estimated to be around £2m, and will also forgo any future income from the agreement.
Serco noted that there was "no evidence" that the misreporting was done with the knowledge or approval of management outside of the contract.
The shares fell 11.2pc to close at 538.5p.