The audit by the former occupation authority's own Inspector General blasts the body for "not providing adequate stewardship" of at least $8.8 billion from the Development Fund for Iraq that was given to Iraqi ministries.

The audit is to be published soon.

The development fund is made up of proceeds from Iraqi oil sales, frozen assets from foreign governments and surplus from the UN Oil for Food Programme. Its handling has already come under fire in a UN-mandated audit released last month.

Among the audit's startling findings were that payrolls in Iraqi ministries under former US occupation authority control were padded with thousands of ghost employees.

Dubious payments

In one example, the audit said the authority, headed by Paul Bremer, paid for 74,000 guards even though the actual number could not be validated. In another, 8206 guards were listed on a payroll, but only 603 people doing the work could be counted.

Three Democratic senators – Ron Wyden of Oregon, Tom Harkin from Iowa and Byron Dorgan of North Dakota – demanded an explanation from Defence Secretary Donald Rumsfeld over the use of the funds by the former US occupation administration, officially known as the Coalition Provisional Authority (CPA).

"The CPA apparently transferred this staggering sum of money with no written rules or guidelines for ensuring adequate managerial, financial or contractual controls over the funds," said the letter sent by the senators on Thursday.

"Such enormous discrepancies raise very serious questions about potential fraud, waste and abuse," the senators said.

An international audit report released last month chided the CPA for oversight of spending of Iraq's oil revenue.

One of the main benefactors of the Iraq funds was Texas-based firm Halliburton, which was paid more than  $1 billion to bring in fuel for Iraqi civilians.