The Government has ordered an external review of governance and culture at The Arts Council.
Ministers were told at a meeting of the Cabinet there is "serious trouble brewing" over the operation of the agency.
The Cabinet decision to approve the review follows a finding by the Comptroller and Auditor General that €7 million was spent by the council on an unsuccessful IT system.
Minister for the Arts Patrick O'Donovan said the review is to begin shortly and will examine all activities and expenditures under the remit of The Arts Council.
Mr O'Donovan presented the agency's annual report for 2023 to the Cabinet which notes an overall loss - estimated at €5.3 million - up to June 2024 when a decision was taken to end the IT project.
Work on the development of the system had cost €6.5m.
The minister said The Arts Council responded in October to concerns raised by his department.
Its examination, he said, made "a number of key findings and 36 recommendations" and found the council "was not prepared for the scale of the project and did not put in place adequate resources to deliver it".
Mr O'Donovan said the Department of Arts has put in place a range of actions to address the shortcomings in oversight and he has told the council to address the concerns as a "matter of urgency".
Opposition parties have raised questions over the delay in publishing the annual report.
'Ambitious' IT project not delivered - The Arts Council
In a statement, The Arts Council confirmed that, in 2018, it "requested sanction to develop new IT systems" as the "ageing online systems were presenting challenges and required improvement".
The council described the "ambitious" project was not delivered.
The Arts Council said that it "acknowledges the significant expenditure on this project and the associated write-off of this expenditure of €5.3m" and "we greatly regret that this ambitious and complex project was not completed".
"We take our role as custodian of public money very seriously and for that reason we are engaging with our contractors with a view to seeking legal redress," the council added.
'Huge expenditure' by council - Taoiseach
Taoiseach Micheál Martin described the issue as "very serious".
He told the Dáil that there was "huge expenditure for a product that has not emerged" and there are "issues in terms of governance of that project" and "the eventual outcome".
Mr Martin said that expects that Public Accounts Committee to examine the matter.
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