More than a quarter of firms will walk away from criminal legal aid work in the next five years, a report slamming the Legal Services Commission’s poor administration has revealed.

The report by public spending watchdog the National Audit Office (NAO) showed that one in six firms made no profit from publicly funded criminal defence work, and 14% made only 1-5% profit.

NAO head Amyas Morse said the LSC must make it a ‘priority’ to ensure that ‘it is paying a fair price for legal aid services that both sustains a competitive supplier base and provides value for money’.

In October the NAO qualified the LSC’s accounts for the legal aid fund for 2008/09 because it found it had overpaid solicitors on criminal and civil cases by an estimated £25m. Legal aid minister Lord Bach has asked the LSC to implement an action plan to recover the overpayments from solicitors.

The NAO said the LSC should do more to understand the market for criminal legal aid, and to make the most of its ability to control price and quality. It said the LSC lacked sufficient centrally held information about its suppliers to be an ‘intelligent commissioner’.

It also criticised the LSC for its failure to pilot or evaluate major changes in practice, or provide set timetables for their introduction.

The results of a survey of 369 firms, published in the report, revealed that only half expected to be doing criminal legal aid in the next five years, with 28% saying they were unlikely to be doing so, due to its unprofitability, the prospect of tendering or retirement.

The survey also revealed tensions in the relationship between the profession and the LSC, with 36% of the 369 solicitors who took part saying they thought the LSC was ‘unhelpful’, and 29% believing it did not fully understand the legal system.

Morse added: ‘Last year the LSC spent over £1bn on criminal legal aid. With such a considerable sum of money involved, it is very important that the commission understands the market from which it is buying and the cost-effectiveness of its own practices, but at present that is not the case.’

Law Society legal aid manager Richard Miller said: ‘We are deeply concerned at the catastrophic picture this paints of the economically precarious position of the majority of the solicitors providing legal aid in criminal defence work.

‘This report goes a long way in dispelling the belief that legal aid lawyers are profiteering from the system. Many of them are not even earning any income from the work they do at all. This is a picture of a supplier base on the point of crumbling into insolvency.’

He said a major overhaul of the system was needed to simplify criminal defence contracts so that they are easier and less expensive for the legal aid solicitors and LSC to administer.

Lord Bach said: ‘I am confident that the reforms which the LSC started to introduce in 2006, such as the introduction of magistrates’ courts means assessment and police station fixed fees, have already strengthened the LSC’s controls over criminal legal aid funding. The NAO’s work will help the LSC to make further improvements.’ LSC chief executive Carolyn Regan said: ‘Work is already underway to implement [the NAO’s] proposals. I look forward to discussing this work in more detail with the Committee of Public Accounts next month.’