Sir Ian Blair has been ordered to explain a £3 million hole in Scotland Yard’s accounts by the end of this week after two officers were arrested on suspicion of fraud.

The Commissioner of the Metropolitan Police, already under pressure over his force’s failings in the Stockwell shooting case, must detail how much money has been lost in fraudulent expenses claims and how it will be recovered. He must also explain why no action has been taken to reform financial systems at the Met despite three years of warnings from auditors.

A spokesman confirmed yesterday that two officers had been arrested last month because of alleged discrepancies in their expenses claims. The two, a detective sergeant and a detective constable from specialist operations, were released on police bail pending further inquiries. Expenses claims by hundreds more officers are to be investigated by the Met’s Directorate of Professional Standards.

At the root of the problem is the use and alleged abuse of American Express cards issued to as many as 3,000 officers and staff. The cards are regarded as essential for officers assigned to long-running investigations where they have to travel extensively or stay away from home for long periods. But Scotland Yard’s internal accounting system has not been examining credit card bills alongside expenses claims, with these being paid automatically, often without receipts verifying the expenditure.

It has been alleged that a minority of officers have exploited the system to charge personal expenditure on holidays, electrical goods or restaurants to their police Amex cards. A source said: “The accounting practices have been very sloppy and there are undoubtedly cases of fraud and theft.”

Scotland Yard’s payment of expenses was identified as a “weak area” and one subject to “inadequate control” in internal auditors’ reports published by the Metropolitan Police Authority (MPA) in 2004-05 and 2005-06.

Lord Harris of Haringey, chairman of the MPA’s corporate governance committee, said: “There has been concern for three years or more that the length of time taken to reconcile credit card bills with expenses was far too long and drawn out. The system was open to abuse.”

Len Duvall, chairman of the MPA, met Sir Ian last week to discuss the situation and demanded a full report from the Commissioner by Friday.

The Met’s auditors are understood to believe that most of the sums unaccounted for will be reconciled as legitimate expenditure. But there are believed to be a minority of cases where officers have claimed fraudulent expenses running into hundreds of thousands of pounds. The controversy does not involve senior officers.

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