A criminal investigation is under way at water supplier Severn Trent after it emerged the Serious Fraud Office (SFO) was scrutinising key leakage data.
The matter was referred to the SFO by Ofwat amid concerns about the reliability of regulatory information supplied by Severn Trent between 2000 and 2003.
Ofwat said doubts about data on leakage arose after it looked into allegations by a senior member of Severn Trent staff that the utility had a discrepancy in its accounts.
Information given to Ofwat is crucial in determining how much water firms such as Severn Trent can charge households for water, waste services and the cost of repairing the network of pipes.
Severn Trent reiterated that customers had not been overcharged as a result of the alleged error, although it has assured Ofwat that it would pay compensation if the regulator finds that this has not been the case.
In a statement, Ofwat said: "It is very important that information which companies submit to Ofwat is reliable.
"Ofwat therefore takes very seriously instances where this may not be the case. It therefore referred its findings to the SFO in May this year.
"The SFO has concluded that the matter is sufficiently serious to warrant a separate investigation by them."
Severn Trent, which also owns the Biffa waste disposal business, became aware of the allegations of accounting inaccuracies in May last year.
The concerns raised by David Donnelly, the income and debt reporting manager at Severn Trent, later became the focus of a four-month inquiry by Pricewaterhouse-Coopers before the matter was passed to Ofwat.
Severn Trent, which has more than eight million customers pledged to co-operate fully with the SFO during its investigation.
Severn Trent said: "The board has taken and will continue to take such actions as it thinks appropriate to ensure the maintenance of both high ethical and professional standards."
A disciplinary inquiry was launched by Severn Trent last year and is largely complete, but the company said no action would be taken until Ofwat has wrapped up its review.
Severn Trent is the second water firm to face an investigation by the SFO in a week after "certain inconsistencies" were found in the General Levels of Service procedures of Southern Water Services.