The Home Office has fired the contractor that lost the details of 84,000 prisoners last month on an unencrypted memory stick.
PA Consulting was contracted to process data from the prison service's J-Track system for helping police officers track and rehabilitate prolific offenders.
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The inquiry found that the data stick used to transfer data between computers at PA Consulting was not encrypted or managed properly.
Home secretary Jacqui Smith said, "This was a clear breach of the robust terms of the contract covering security and data handling."
Based on the finding of the inquiry, the Home Office has terminated the contract and will review all other contracts with PA Consulting, she said.
The firm said in a statement that it accepted responsibility, but that the loss of data was caused by an employee who breached information security processes.
The statement said several government departments have carried out their own extensive audits of PA projects and in all cases have found them to be fully compliant.
Andrew Rigby, partner at legal firm Brodies, said government will have the right to claim compensation for PA Consulting's breach of contract.
However, he said the extent of the claim will be limited by the terms of the contract.
The home secretary has commissioned a report on the government response to the incident.
"Given the seriousness of this incident, I believe it is important to provide external assurance to the public on our response to the incident and enable others to benefit from the lessons learned, she said.