The commonwealth faces “unique fraud risks” arising from its management of the $3.2bn portfolio of environmental water in the Murray-Darling Basin, an internal audit has found.

The audit, written by Ernst & Young, and previously withheld from the public, found the Commonwealth Environmental Water Holder (CEWH) and the near $3.2bn worth of water it controls, was at risk of being defrauded by state agencies, individual officers within those agencies and private landholders.

Despite finding serious risks to a major commonwealth asset, the report was only released through Senate processes instigated by the Greens senator Sarah Hanson-Young and the Centre Alliance senator Rex Patrick.

The report highlighted that the CEWH relied on its state counterparts to deliver water outcomes but sometimes the outcomes desired by the states did not align with those of the commonwealth and the Water Act.

For example, Ernst & Young highlighted the CEWH’s efforts to aid the Coorong, an internationally important wetland at the end of the Murray River system.

Just above the Coorong are the Lower Lakes, which are important for South Australia’s tourism, recreation and amenity.

In 2015-16 the South Australia government requested environmental water from CEWH, while at the same time deferring other water it was entitled to buy.

Lake water levels were kept high but sufficient water was not delivered to the Coorong. South Australia could have paid for the entitlement water it had deferred to maintain recreation and tourism in the lakes but, in Ernst & Young’s words, “it could be perceived that environmental water was being substituted for SA’s entitlement flow”.

The Ernst & Young report and other documents have been analysed by the Australia Institute in a report, Coorongs Don’t Make a Right. The Australia Institute says the South Australian government saved itself an estimated $175m, which is the cost of the entitlement water it would have bought on the open market.

“Taxpayers have spent billions buying water for the environment but it is totally reliant on the state agencies to get the water where it needs to go,” said Maryanne Slattery, a senior water researcher at the Australia Institute.

“Worse still, the commonwealth has no legal clout to force states to deliver the water in the way the commonwealth wants.”

As well as the risks of state agencies intentionally misusing CEWH resources to achieve their own objectives, the Ernst & Young report warns the lack of governance in the use of environmental water opens the door for individual water officers to misuse the CEWH water resources. This could include taking water for commercial gain for themselves and/or their family or associates.

A third risk identified was in the unauthorised access or misuse of environmental water by private landholders. Examples of this type of alleged behaviour are now the subject of prosecutions in New South Wales. However, WaterNSW only took action after the ABC’s Four Corners exposed allegations of misuses of environmental flows in the Barwon-Darling.

“Ernst & Young discovered this major asset ‘relies on relationships developed at the officer level rather than agreed processes’ and is dependent on ‘verbal or other non-legally binding agreements’,” Slattery said.

“In other words, a $3.2bn asset and internationally significant wetlands are being managed by handshakes, winks and nods.”