Immigration minister Beverley Hughes has blamed managers in her department for an "excess of zeal" for waiving checks on eastern European immigrants.
Hughes says current systems are not good enough
An internal inquiry cleared ministers of manipulating immigration figures.
But the probe highlighted deficiencies in the Home Office's Immigration and Nationality Directorate (IND).
Ms Hughes, who faced calls to resign over the affair, said the inquiry showed staff had "gone too far" in easing checks on immigrants.
She said an "urgent overhaul" of immigration management methods was underway and staff involved in the scheme were now facing a disciplinary investigation.
The report showed "mistakes were made," Ms Hughes said, but there was "no suggestion that they were deliberate or the result of lack of effort".
"Rather there was an excess of zeal in pursuing the common objective of reducing backlogs."
The report showed that the decision to introduce the secret policy was "taken by middle ranking mangers" at the IND's Sheffield office, said Ms Hughes.
"It was not cleared with senior officials ... or with ministers," she added.
Whistleblower civil servant Steve Moxon told the Sunday Times his unit of the IND in Sheffield was told to waive checks on residency applications from people from the Eastern European countries set to join the EU in May.
The Home Office said 36,000 applications during the most recent financial year had been processed under the scheme affected by the checks change, and 29,000 of them were from people already lawfully in the UK.
The new changes mean ways of tackling backlogs will have to be approved "at director level with appropriate ministerial oversight".
In addition to the "uregent improvements" to IND management systems, Ms Hughes said there would also be a new audit system to inspect working practices and performance in all parts of the directorate.
But Conservative spokesman Humfrey Malins branded the report a "whitewash" and renewed his party's call for Ms Hughes to quit.
"The buck has to stop somewhere," he told BBC Radio 4's World at One programme.
"The central allegation was that this was a secret policy completely to relax controls on Eastern European entrants in order for them to be able to say that fewer people would come after May 1 if they were allowed in before."
He added that that central allegation remained and he called for Mr Moxon to be reinstated.
Meanwhile Mr Moxon insisted that "very senior management" in Sheffield were aware of what was going on in terms of waiving some of the checks.
The prime minister's official spokesman said Tony Blair retained confidence in Ms Hughes.
"He believes Beverley Hughes is a first class minister who has one of the hardest briefs in government and has made a significant difference, for example halving the number of asylum applications," the spokesman added.