An inquiry into a possible £20million fraud at Sport England is under way after the publicly funded organisation discovered a bank account that it did not know it had.

Sport England, which distributes about £200million a year to grassroots sport, has appointed Timothy Dutton QC, a specialist in disciplinary and regulatory law, to lead the investigation into whether money was misappropriated over a seven-year period.

The so-called World Class Payments Bureau distributed £19.7million between 1999 and 2007 to small sports governing bodies who did not have the financial structures in place to handle large sums of money. The bureau is thought to have paid grants, salaries and expenses to athletes, coaches and administrators on behalf of sports that were essentially organisations run by volunteers.

At the time of the bureau's creation, Sport England was chaired by Sir Trevor Brooking, the former England and West Ham United midfield player who is now director of development at the FA. Derek Casey, who most recently was Glasgow's successful bid director for the 2014 Commonwealth Games, was the body's chief executive. The present Sport England board did not know of the bureau's account - dormant since March 2007 - until it received a bank statement on Christmas Eve last year.

Jennie Price, the chief executive appointed in April 2007, immediately closed the account and ordered an internal investigation, which concluded that Sport England could not be sure that all the money had reached its intended recipients.

Dutton will look at who sanctioned the creation of the bureau and its account, who knew about it subsequently and whether any money was misused. He is expected to report back in the autumn.

Richard Lewis, appointed Sport England chairman in February, said: “It is concerning that a bank account operated outside the usual financial controls of Sport England. This fell short of the procedures and safeguards now in place in this organisation.”

The Times understands that the last payment from the account was to Karate England, the sport's governing body. The organisation has been the subject of fraud allegations in the past.

An investigation by The Times published in November 2006 found that Nick Halafihi, the former chief executive of Karate England, had used hundreds of thousands of pounds of public money to convert his garage and had received his three-year £15,000 car allowance up front. The payments were authorised through the World Class Payments Bureau.

Karate England's story mirrors others' in sport, which is receiving unprecedented amounts of public money for the 2012 Olympics in London.

A group of coaches in baseball and softball claim that millions of pounds have not reached the grass roots and have called for an investigation. They have taken their allegations to the police.

Sport England, which reports to the Department for Culture, Media and Sport, has long been regarded as the weak link in an indecipherable alphabet soup of government-backed funding bodies for sport and recreation.

Its remit has changed almost as many times as its leadership as a succession of ministers struggled to define its role. Its present strategy to build a “world-class community sports structure” was established by James Purnell, then Culture Secretary, in November 2007, but the change of tack prompted a row with Derek Mapp, who resigned as chairman.

The post was vacant for 15 months until Mr Richard Lewis was lured from as successful tenure at the Rugby Football League for a job considered a poisoned chalice in sports politics.