Auditor-General Kevin Brady examined 100 case files, including 52 high risk offenders, and found that in most of them the department had not followed its own procedures.
Corrections Minister Judith Collins said she had asked State Services Commissioner Iain Rennie to tell her who was accountable for the "serious failing" Mr Brady had identified, and what could be done to restore public confidence in the department.
Asked at a press conference whether she had confidence in Mr Matthews, Ms Collins replied: "I have confidence that Mr Matthews understands just how importantly I am viewing this report."
Mr Matthews was employed by the State Services Commission and it was not up to her to say whether he risked losing his job, she said.
"It's a very serious issue and I'm not going to prejudge what the State Services Commissioner is going to come back with," she said.
Mr Rennie has 10 working days to report to the minister.
Ms Collins said the report was evidence of "a damning failure" by the department.
"I'm not going to blame the system, I want to know who is accountable," she said.
Mr Brady said five of the requirements his staff checked were the most important for keeping the public safe, and one or more of those requirements had not been followed in most of the 100 cases.
"If the department does not follow all of the important procedures when managing an offender, I am concerned that the cumulative effect undermines the department's ability to protect the public," he said.
"On any given day, the department's staff manage about 8000 prisoners and about 35,000 people serving community based sentences and orders. This includes about 1800 offenders who have been released early on parole."
Ms Collins said the death of Karl Kuchenbecker at the hands of Graeme Burton in January 2007 was the catalyst for the report, and it covered a period after provisions had been strengthened because of that.
"The audit actually found that despite all of this, corrections were not following their own procedures," Ms Collins said.
"This isn't a temporary breakdown. I'd call it a damning failure."
Mr Brady made five recommendations and Ms Collins said she had been assured immediate steps were being taken to implement them.
She was going to order regular reports on implementation, as well as seeking more funds for recruiting and training parole staff.
