The University of Auckland's controversial purchase of a $5 million Parnell mansion for its vice-chancellor has been slammed by the Government's financial watchdog.

The university bought the four-bedroom property in November last year as a home for incoming Vice-Chancellor Dawn Freshwater.

Boasting manicured gardens, 338sq m of floorspace across three storeys and a spa and lap pool, the purchase was subsequently labelled "frivolous" and a "slap in the face" by student unions.

Now investigators from the Auditor-General's Office say the purchase clearly involved "sensitive expenditure".

That meant the partly taxpayer-funded organisation ran the risk of being seen to give "disproportionate" benefit to Freshwater above the business needs of the university, the Auditor-General said in a report released today.

"In my view, the university has not been able to show a justifiable business purpose for purchasing the house.

"The university has also been unable to show that the expenditure was moderate and conservative."

The university's purchase of the boutique home was exclusively uncovered by the Herald in January.

However, concerns about the expensive purchase by the university grew as the Covid-19 pandemic hit.

The university now forecast a $48m drop in revenue by 2023 as it faced an unknown period without its lucrative overseas students.

The Auditor-General's Office confirmed in October it was also "looking at aspects of the purchase" in its role as watchdog charged with keeping an eye on the finances of organisations receiving taxpayer money.

"We had seen media coverage and were interested in establishing the facts," a spokesman for the office told the Herald at the time.

It requested copies of the home's sale and purchase agreements, rental valuations and various internal emails, an Official Information Act response revealed.

Vice-Chancellor Dawn Freshwater has told staff in a group email that she recommended the university sell the home to help pay down debt. Photo / Supplied

It also reviewed Freshwater's employment contract and interviewed staff at the university about how they made the purchase.

"It is hard to accept that purchasing a house to provide accommodation for the incoming Vice-Chancellor, and to host an anticipated 14 events in two years, justifies the $5 million expenditure," the Auditor-General said today.

"Nor does that level of hosting, in my view, justify an almost 50 per cent reduction in the property's rent."

A university spokeswoman earlier told the Herald the home was purchased both as a rental for Freshwater but also as a venue to host important wining-and-dining events.

"It will be rented from the university by the incoming vice-chancellor for accommodation and will also be a venue for university-related events and hosting," the spokeswoman said.

Documents released to the Herald under the Official Information Act showed the university planned to host eight "donor dinners" in 2020/21 at the Parnell residence.

The names of the donors attending were redacted from the documents.

It also planned to host six "stakeholder dinners".

Attendees at the planned stakeholder dinners included politicians and representatives of foreign universities.

However, in October Freshwater told staff in a group email that she had recommended the university's board consider selling the controversial Parnell home to help pay down debt.

Due to restrictions on social gatherings during the Covid-19 pandemic, the home had not been able to be used for fundraising and other university events, she said.

The university paid $5.06m for the house, located near Sir John Key's St Stephens Ave home, in December. That was $1.5m above the council valuation.

A university spokeswoman denied Freshwater's decision was linked to the Auditor-General's review.

"It is the right thing to do, not something the university has to do," she said.

The Auditor-General said the university had taken steps to review the home's purchase after it was provided with a draft of today's report.

This included a review of its sensitive expenditure policy and processes.

"The Vice-Chancellor also told us that she has recommended to the University Council that the Parnell house be sold to assist with the University's overall financial position," she said.

The university said it accepted the Auditor-General's findings and acknowledged its shortcomings in its "handling of the purchase process".

"As is noted in the report, we have already commenced work to rectify those issues," it said.

This included commissioning independent advisers to review the university's policies related to sensitive expenditure.

"The University of Auckland takes its responsibilities regarding the use of public resources very seriously," it said.