The Security Intelligence Service (SIS) has been told by the government it must lift its game, particularly in relation to how it carries out national security vetting.
The Inspector-General of Intelligence and Security has received complaints from at least three people who say they lost their jobs as a result of not being cleared by the SIS.
Inspector-General Cheryl Gwyn, who has detailed the complaints in her annual report, said three people, who were employed in positions that required security clearances, all lost their jobs as a result of the SIS's background checks.
A fourth complainant had an offer of employment withdrawn.
The SIS was also found to have failed to provide Ms Gwyn's office with copies of two visual surveillance warrants, as should have happened.
Minister Chris Finlayson, who is responsible for New Zealand security agencies, was not impressed.
"In the overall scheme of things, the SIS is actually improving its compliance very well but they've still got a way to go... they've been left to no uncertain terms as to what I think about this slip-up."
Ms Gwyn identified systemic shortcomings in how the SIS carried out the vetting assessments.
The SIS generally relied on information provided by those seeking a clearance and non-nominated referees, and also never considered any possible bias, she said.
Mr Finlayson said the SIS used ancient vetting procedures that needed to be updated.
Labour Party foreign affairs spokesperson David Shearer said he would expect the SIS to turn things around.
The Inspector-General was shining a light on the country's spy agencies in a way that hadn't been done before, which would encourage better practices, he said.
However, Greens co-leader James Shaw was not convinced.
It was the fourth report in a row that was critical of the nation's spy agencies, he said.
The powers of the agencies needed to be curbed and political oversight beefed up.
But Mr Finlayson said the report showed the system was working and that Ms Gwyn's position was not toothless.
"She's making inquiries when they need to be made - both on compliants and also motion inquiries. I'm very happy with what she's doing."