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Politicians who approved the appointment of Auditor-General Martin Matthews are calling for an independent inquiry into a fraud case that happened under his watch.

Winston Peters

New Zealand First leader Winston Peters has gone further, saying Mr Matthews should be stood down to allow the scale of the fraud to be investigated.

Mr Matthews was head of the Ministry of Transport when former general manager Joanne Harrison stole $726,000 from the ministry. She was sentenced to 43 months' jail on dishonesty charges in February.

It has been reported that Mr Matthews was repeatedly told of Harrison's unusual behaviour but did not intervene.

Opposition parties are consulted about the appointment of officers of Parliament such as the Auditor-General.

Mr Peters was angry that parties were not given more information about Mr Matthews' handling of the case during the appointment process.

"Ministers knew about this and knew that when action was required to have been taken by an investigative mind, which the Auditor-General surely must have, it wasn't taken," he told Radio New Zealand.

"And now the Auditor-General himself, I believe, must stand down until a full-scale inquiry gets to the end of this matter and points blame where it should have laid in the first place."

Mr Peters said he found it hard to believe Mr Matthews did not know what was going on at the ministry. His party would not have approved his appointment if it had known about his lack of action to prevent the fraud, he said.

Labour MP Trevor Mallard represented Labour on the panel that approved Mr Matthews. He would not comment on what information about the Auditor-General's actions was made available to the panel.

But Labour leader Andrew Little said information had been made public since Mr Matthews' appointment that Mr Mallard was not aware of when he was being vetted.

Mr Little would not say whether his party would have opposed Mr Matthews' appointment if it had the fully story about the fraud case. But he said it should be investigated by the State Services Commission.

United Future leader Peter Dunne also wanted the commission to step in.

Prime Minister Bill English, speaking to reporters in Japan, said if there were any allegations that Mr Matthews failed to act, it would be a matter for the State Services Commission.

But he said calls for Mr Matthews to stand down were "a pretty drastic way of dealing with the issue".

"While there may be ongoing speculation about it, the issue does appear to have been dealt with satisfactorily In fact, it demonstrated that the system is able to pick up these kind of problems."