Auditor-General resigns over fraud investigationby Benedict Collins and Craig McCulloch
But the MPs who ordered that report are now refusing to release it to the public.
Mr Matthews was head of the Transport Ministry while a manager, Joanne Harrison, stole nearly three quarters of a million dollars over several years, despite staff repeatedly raising concerns.
He stepped aside temporarily from his subsequent role as Auditor-General while an inquiry was carried out into whether he was suitable to remain the country's top public watchdog.
That investigation, by senior public servant Sir Maarten Wevers, began in May and was due to take two weeks, but was delayed.
Mr Matthews confirmed his resignation this afternoon, saying the "issues and speculation" about how he handled the fraud investigation made it "untenable" for him to continue on as Auditor-General.
"I deeply regret and apologise for the fraud that was committed," he said in a written statement.
"I wished it had never happened but I accept I am accountable for everything done in and by the Ministry when I was CEO and I am ultimately responsible.
"I feel as angry and aggrieved as anyone about [Harrison's] stealing and breaches of trust."
Joanne Harrison was sentenced in February to three years seven months in prison for defrauding the Crown of $723,000.
A separate inquiry by the State Services Commission last month found Harrison helped force whistleblowers out of their jobs too early after they raised concerns about her.
One of the whistleblowers earlier told RNZ it was "appalling" Mr Matthews was made Auditor-General and should be held accountable.
The staff were given a payout and personal apology from the head of the public service, Peter Hughes. The government also apologised for their treatment.
Mr Matthews said today he regarded Harrison as "an able and high performing member of the leadership team" until April 2016 when he received some "concerning information".
"I believe I acted swiftly and thoroughly to detect the fraud and bring her to justice when I became aware of her potential wrong doing."
But he said he wished he had detected the criminal activity much earlier.
"She gave me explanations that I accepted. It turns out I was wrong. I should have been more suspicious."
Labour MP Sue Moroney said Mr Matthews' resignation had been "a long time coming".
"It's been obvious to me from the outset that all was not well," she said.
"I've always felt that there were far too many questions unanswered about how Martin Matthews dealt with a fraud that happened right under his nose."
Mr Matthews was appointed to the role by a cross-party group of MPs last year.
But New Zealand First leader Winston Peter said he should never have got the job.
"The original appointment was unsound because they hadn't acquired all the information to make a sound judgement.
"You'll get a whole lot of establishment figures who will rush out to say this is all fine and dandy when it's not."
The Parliamentary committee which ordered the review won't release it, saying the matter's now closed.
But Mr Peters said that was unacceptable.
"You cannot have an inquiry that goes to that level at some significant expense into such a high office and then keep the findings secret from the taxpayer."
United Future leader Peter Dunne called the report a "full and devastating critique" and said it was "untenable" for Mr Matthews to stay on.
"It would've been very difficult for him to survive that."
Mr Dunne suggested Parliament would've had to pass a resolution of no confidence if Mr Matthews hadn't stood down.
Speaker of the House David Carter said five major parties - including New Zealand First - agreed for the report to stay confidential.
And he dismissed criticism of Mr Matthew's appointment in the first place, calling such comments "stupid".
"All five major parties are represented [on the committee which appointed him].
"They made the decision at the time. A considerable amount of information has come out subsequent to that appointment and it has now cost Mr Matthews his job."
Transport Minister Simon Bridges said Mr Matthews' departure brought "the sorry saga" to an end.
This story was first published on the RNZ website.
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