Fraudsters may have stolen £500,000 from a taxpayer-funded scheme aimed at accelerating the removal of dangerous cladding from buildings, the public spending watchdog has revealed.

The National Audit Office said the government decision to prioritise speed in handing out money to building owners had increased its risk of losses from fraud.

The warning came in an NAO report into the government’s progress in remediating dangerous cladding from blocks after the Grenfell Tower fire in 2017.

It found that as many as 60% of buildings across the country with dangerous cladding have yet to be identified, while of the 4,771 buildings that had been identified, work had started on only half of them.

The £4.5bn Building Safety Fund was launched in 2020 to protect leaseholders in England from the costs of cladding removal after the Grenfell Tower tragedy after tens of thousands received bills, in some cases as high as £100,000.

However, the NAO report revealed that last autumn the fund was subject to a potential fraud in which £500,000 was paid to an unnamed suspected scammer using a mechanism in which 80% of the funding for a scheme could be paid upfront.

After the potential fraud was identified, the Ministry of Housing, Communities and Local Government (MHCLG) commissioned an independent review of the case, which found a number of problems with its processes.

These included a reliance on self-certification, which limited the ministry’s ability to verify details, the report also stating that the 80% advance payment structure “increased the opportunity and motivation for fraud”.

The report said the fund carried an inherent risk of misrepresentation and collusion in “an industry with known historical integrity issues”, while also finding that there had not been a fraud measurement programme linked to the scheme.

A later review of the scheme’s fraud management found that the controls were “not commensurate with the programme’s risk”.

The NAO’s comments have echoes of its findings about the government’s emergency Covid lending scheme, which the watchdog found had prioritised speed over fraud prevention.

The NAO report estimated that the total cost of fixing all of the country’s buildings with dangerous cladding could hit £16.6bn, with £9.1bn of that coming from the taxpayer and the rest funded by developers, private owners and social housing providers.

The NAO believes the industry is not on course to hit a government target of remediation of all blocks over 11 metres tall by 2035 and dangerous cladding could remain on blocks well after that. This means that dangerous cladding could still be on buildings more than 20 years after the Grenfell Tower fire.

The NAO said the government should consider tougher enforcement activity to help resolve or avoid protracted disputes over scope of works if the speed of the programme has not increased by the end of the year.

It has also called for MHCLG to look into conducting an exercise to estimate the extent of undetected fraud and error across the cladding works, to help it understand the scale of the problem and where to carry out further investigations.

Geoffrey Clifton-Brown, the chair of the Public Accounts Committee, said: “The programme is falling behind schedule and MHCLG needs to pick up the pace to get it back on track. There is a long road ahead to resolve the cladding crisis and the government must take steps to better protect the taxpayer. It urgently needs to ensure its fraud controls are working and that developers contribute their fair share to the costs.”

The building safety minister, Alex Norris, said: “The pace of remediation to make homes safe has been unacceptably slow. This government is taking action – meeting our commitment to invest £5.1bn to remove dangerous cladding and making sure those responsible pay for the rest.

“This government will protect leaseholders and empower regulators to take enforcement action against those building owners who fail to act.

“Since coming into office, we have ramped up work with local authorities and regulators to speed up remediation and we will set out a remediation acceleration plan soon.”