New South Wales taxpayers could be shortchanged up to $500m by a state government “accounting trick” that allows mining companies to dodge paying appropriate contingency costs for site rehabilitation.

A 2017 report by the NSW auditor general found that security deposits paid by miners for future rehabilitation were inadequate and made several recommendations, including that the “contingency” costs be increased.

Though not part of the formal recommendation, the report said contingency costs should range from 25% to 50% (of the estimated total rehabilitation cost).

The environmental group Lock the Gate has obtained a letter, through Freedom of Information, that shows the NSW Department of Planning and the Environment told a parliamentary committee last year it had accepted all of the auditor general’s recommendations, and that it had already increased contingency costs.

The department told Guardian Australia this week it had increased “contingencies” to 30%. But it later clarified that figure included “contingency” and two other metrics – project management costs and post-project environmental monitoring – which were dealt with separately by the audit.

The amount for “contingency” remains at the previous level of 10%.

Rick Humphries, the mine rehabilitation coordinator at Lock the Gate, said the new arrangements were “an accounting sleight of hand” that had the effect of not forcing mining companies to meet the standards outlined by the audit.

“Contingency is a very specific tool designed to protect the taxpayer in this case from mine closure uncertainty. You need contingency to account for uncertainty (and the audit) recommended it should be substantially increased.

“What they’re trying to do is bundle three elements together, call them ‘contingencies’ and claim the contingency has been raised ... and that’s simply not true.

“In effect this is another subsidy to the mining industry, particularly coal. Ultimately now if a project doesn’t go according to plan, the taxpayer will have foot that bill.”

Lock the Gate estimates the shortfall will be about $500m – a calculation based on the $2.2bn held by the government in the form of cash and bank guarantees, and the findings of the audit that contingencies were insufficient.

Humphries said the department’s suggestion it had implemented recommendations of the audit was “a serious misrepresentation of the facts”.

“It is placing the interests of the mining sector over those of the NSW taxpayer,” he said.

In a statement, the department said in response to the audit it “committed to improving the security deposit scheme process by updating the security calculation tool (including providing for increased contingencies), which was implemented from July 2017.

It said “contingencies” increased from 15% to 30%. But when asked to clarify, the department confirmed that amount included project management and post-project monitoring costs, not purely “contingency” for uncertainties.

The audit recommendation was that the department increase “the contingency for uncertainties associated with mine rehabilitation and closure”.

“Additionally, the department has the power to adjust a security deposit at any time, should an inspection or review of mining operations plans reveal the need for additional funds,” the department said.