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* Fresh blow for G4S in torrid spell
* Audit showed companies charged for tagging dead people
* Case puts government outsourcing policy under scrutiny
By Neil Maidment and Kate Holton
LONDON, July 11 (Reuters) - Britain on Thursday placed all contracts held by outsourcing firms G4S and Serco under review after an audit showed they charged for tagging criminals who were either dead, in prison or never tagged in the first place.
The news, which wiped millions of pounds off the firms' value, was the latest blow in a torrid spell for G4S which makes around 10 percent of its 7.5 billion pounds turnover from British government work.
Its reputation was severely hit last year when it failed to provide enough security guards for the London Olympics and a profit warning in May led to the departure of long-serving chief executive Nick Buckles.
G4S shares have slipped by over a quarter in three months.
The government said Serco had agreed to co-operate with an audit of all its contracts and it had asked the Serious Fraud Office to consider carrying out an investigation into G4S which declined to allow a further review into the tagging deal.
The companies are two of the government's biggest suppliers and run services from prisons and immigration centres to transport.
The current tagging contract was worth around 50 million pounds to G4S. UK public sector work, which also includes local government contracts, accounts for just under half of Serco's 4.9 billion pounds revenue.
Shares in G4S fell 5 percent to give it a market value of 3 billion pounds ($4.5 billion). Serco shares were down 8 percent, valuing it at 3.1 billion pounds.
"The House will share my astonishment that two of the government's biggest suppliers would seek to charge in this way," Justice Secretary Chris Grayling told lawmakers in parliament.
"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," he said, adding that he had no information to suggest the two firms had knowingly engaged in dishonest practices.
The news is unwelcome for the Conservative-led coalition government which has ramped up the rate of work it outsources to private firms which say they can do it cheaper.
Wider scrutiny of outsourcing deals is forcing ministers to try and spread some business to smaller firms.
"Today's announcements strengthen our view that UK outsourcing is going to remain a tough place to be ahead of the 2015 election," analysts at Westhouse said.
The Ministry of Justice (MoJ) said on Thursday an audit found some instances of tagging charges for people who had died, people who were back in prison and had their tags removed, and for people who had not been tagged at all.
The audit also revealed that some of the issues around tagging, which monitors whether offenders are adhering to curfews and are a cheaper alternative to prison, were first discovered by the MoJ in 2008 but were not addressed.
Grayling said he wanted an independent forensic audit of the contracts to rule out any foul play, to which Serco had agreed and G4S declined.
G4S, the world's biggest security firm, said it was running its own review and would reimburse any money that is owed. "G4S believes that any evidence of dishonesty should be referred to the relevant authorities, including if appropriate, the SFO," it said.
It said it would work with government on the audit of all other contracts.
Serco CEO Christopher Hyman also said it would repay any amount that was due. "We will not tolerate poor practice and behaviour and wherever it is found we will put it right."
Serco said the award of a prisons contract in Yorkshire would be delayed and added it had withdrawn from bidding for a new tagging contract due worth up to 150 million pounds a year, according to analysts.
G4S remained in the running for that contract but the MoJ was reviewing whether to exclude the firm from competition.