Shortly after an audit report showed the Ministry of Railways had spent 18.5 million yuan ($2.91 million) on a disappointing publicity short film, the public was shocked again to learn that a huge chunk of the investment might have been pocketed by ministry officials.

An insider disclosed that at least 7 million yuan was used as kickbacks in the expensive film that involved Zhang Yimou, the famous Chinese director who oversaw the 2008 Olympic Games' opening ceremony in Beijing, the Economic Information Daily (EIC), run by the Xinhua News Agency, reported Monday.

The five-minute promotion film, Chinese Railways, shot in 2010, was brought into question after the State Audit Administration in late June revealed the cost of the film and commented that it "failed to produce its desired effects." Few people saw the movie until the scandal broke.

The ministry assigned the film to Beijing New Time Film and Culture Company, which signed a contract with Zhang with a consultancy fee of 2.5 million yuan after tax, the EIC reported.

An anonymous insider from the intermediary film company told the newspaper that in addition to the film production cost of between 6 and 7 million yuan and Zhang's payment, "someone took the remaining 7 million yuan as a kickback."

The insider also admitted the company won the contract without going through a public bidding process.

According to related regulations, government procurement worth more than 1.2 million yuan should go through a bidding process.

Zhang told the EIC that he only provided some advice and did not agree to have his name used with the film, according to his contract with the film company.

Zhang admitted that he charged 2.5 million yuan after tax as the consultancy fee.

The railways ministry told the EIC that it spent 18.5 million yuan on the film because of Zhang's fame and it wanted his name on the film, but the intermediary company must have cheated the ministry, and will be held legally responsible. The ministry also said it would "check thoroughly who took kickbacks."

After the audit report in June, Chen Yihan, deputy secretary-general of the ministry's literary and art association, and her husband, Liu Ruiyang, deputy director of the vehicle department, were put under investigation, Caixin magazine reported.

Prosecutors found the ministry had transferred 14 million yuan to  Beijing New Time, and the shortfall of more than 4 million is under further investigation, the EIC reported.

"It is an old trick for a government department to open a subsidiary company and carry out illegal business secretly. Whenever the scandal is exposed, the department distances itself from the case and blames the company for its own fault. Who would ever believe the ministry has no connection with the company?" a Beijing lawyer Chen Baicang told the Global Times.

The ministry has recently been suffering from a credibility crisis. Its former railways minister, Liu Zhijun, was expelled from the Communist Party of China (CPC) after being found guilty of corruption in May.

"The government should detail the expenditures of the government procurement fund to make sure that the money isn't abused," Zhu Lijia, a professor at the Chinese Academy of Governance, told the Global Times Monday.

"Apart from retrieving the money, the government should impose harsh penalties on officials who violate the law for personal interests. The judicial organ should intervene to punish those who abuse their rights," said Zhang Yaocan, a professor of political science and law at Central China Normal University.