The Serious Fraud Office has been called in by the justice secretary to investigate the private security company G4S for overcharging tens of millions of pounds on electronic tagging contracts for offenders.

Chris Grayling told MPs the overcharging included billing for tracking the movements of people who had moved abroad, those who had returned to prison and had their tags removed, and even people who had died.

He said he had made the decision after G4S refused on Wednesday to co-operate with a voluntary forensic audit of its billing practices and to withdraw as a potential bidder for the next generation of tagging contracts worth up to £3bn.

"At this time I do not have evidence of dishonesty by G4S but I have invited the Serious Fraud Office to investigate that," he said.

Whitehall sources say that a new forensic audit will look at a central allegation that the justice ministry was being billed for the tagging of 18,000 offenders a day when only 15,000 were actually being monitored – raising the prospect of being charged for 3,000 "phantom" offenders or one in six of all those on tags.

Grayling told MPs that G4S and a second major supplier, Serco, had been overcharging on the existing £700m contract, with the Ministry of Justice being billed for non-existent services that dated back to at least 2005 and possibly as long ago as 1999.

Grayling added that it included charging for monitoring people who were back in prison and had had their tags removed, people who had left the country, and those who had never been tagged in the first place.

"There are a small number of cases where charging continued for a period when the subject was known to have died," he told the Commons.

"In some instances, charging continued for a period of many months and indeed years after active monitoring ceased. This is a wholly indefensible and unacceptable state of affairs. The house will share my astonishment that two of the government's biggest suppliers would seek to charge in this way."

Shares in Serco fell about 8% and for G4S almost 6% by the close on Thursday.

The decision to call in the SFO follows an audit by PricewaterhouseCoopers commissioned by Grayling in May after billing discrepancies were discovered during a re-tendering process. Under the contracts the movements of more than 20,000 offenders are monitored using electronic ankle tags at any one time.

"The audit team is at present confirming its calculations but the current estimate is that the sums involved are significant, and run into the low tens of millions in total, for both companies, since the contracts commenced in 2005," Grayling said.

Serco, which is one of the government's biggest and most important suppliers, agreed on Wednesday to fully co-operate with a forensic audit to establish whether any dishonesty took place on its part. It has also agreed to withdraw from bidding for the £3bn next-generation tagging contract.

"They have said they take the issue extremely seriously and assure me that senior management were not aware of it. They do not believe anything dishonest has taken place, but we have agreed that if the audit does show dishonest action, we will jointly call in the authorities to address it," Grayling said.

Serco was the leading bidder to take over the management of a prison in South Yorkshire. Grayling said that decision had now been delayed until the voluntary forensic audit was completed.

The Cabinet Office is to review all G4S and Serco contracts held across government as a result of the tagging scandal. The Cabinet Office minister, Francis Maude, had already started preparations for a register of companies holding public sector contracts to detail their track record in the wake of G4S's failure last year to fulfil its contract to provide security guards for the London Olympics.

Grayling, who had the attorney general, Dominic Grieve QC, next to him when he made his Commons statement, said he had taken the decision to call in the SFO "given the nature of the findings of the audit work that had taken place so far, and the very clear legal advice that I have received".

He said the SFO was being asked to consider whether an investigation was appropriate, and to confirm "whether any of the actions of anyone in that company represent more than a contractual breach".

The justice secretary has started a formal process to determine whether to exclude G4S from the next 10-year tagging contract which is due to start shortly. He has also taken action within the justice ministry after disclosing that his own officials became aware in a limited way of some of the problems in 2008 but failed to take adequate steps to address them.

He said an entirely new contract management team had been put in place. "The permanent secretary is also instituting disciplinary investigations to consider whether failings on the part of individual members of staff constitute misconduct", he said.

The shadow justice secretary, Sadiq Khan, said the disclosures were "truly shocking" and the police should be called in immediately to investigate Serco as well as G4S. "There can be no cosy relationship with either company if we are to truly get to the bottom of these very serious allegations," he said.

G4S said the justice ministry was an important customer and it was committed to resolving its concerns. It said it was conducting its own review and would reimburse any overbilling it identified. It said it was not aware of any indications of dishonesty or misconduct.

Ashley Almanza, the G4S chief executive, said: "We are committed to having close and open relationships with our customers and we strive to work in partnership for the mutual benefit of our organisations.

"We place the highest premium on customer service and integrity and therefore take very seriously the concerns expressed by the Ministry of Justice. We are determined to deal with these issues in a prompt and appropriate manner."

Serco Group's chief executive, Christopher Hyman, said: "Serco is a business led by our values and built on the strength of our reputation for integrity. These values lie at the heart of the many thousands of our people who are endeavouring to deliver the highest standard of service to our customers around the world. We are deeply concerned if we fall short of the standards expected of all of us."