The US Special Inspector-General for Iraq Reconstruction was scathing in criticism of how the former occupation authority - known officially as the Coalition Provisional Authority (CPA) - appropriated Iraqi money until it handed over power last June to Iraq's interim government.

"The CPA provided less-than-adequate controls for approximately $8.8 billion in DFI (Development Fund for Iraq) funds provided to Iraqi ministries through the national budget process," said the report, released on the same day Iraqis voted in elections.

"We believe the CPA management of Iraq's national budget process and oversight of Iraqi funds was burdened by severe inefficiencies and poor management," it said.

Bad management

DFI 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 by several UN-mandated audits.

Bremer rejected the findings of
the audit, citing poor standards

The report said the occupation authorities failed to ensure funds were not used to pay "ghost" employees and cited one example where officials authorised payment for about 74,000 guards but only a fraction of these could later be validated.

The audit said there was no assurance that the funds were used for purposes mandated by United Nations resolutions.

UN auditors have also accused the occupation authorities of sloppily managing billions of dollars of Iraqi oil money and moving slowly to guard against corruption.

Bremer responds

Former occupation authority chief Paul Bremer, who received a Presidential Medal of Freedom last month for his work in Iraq, rejected the US audit's findings and said it did not "meet the standards that Americans have come to expect of the Inspector-General".

The audit "did not meet the standards that Americans have come to expect of the Inspector General"

Paul Bremer,
former occupation authority chief

"The draft report assumes that Western-style budgeting and accounting procedures could be immediately and fully implemented in the midst of war," said Bremer in a written reply to auditors when he received the first draft.

Bremer said any delays in paying Iraqi public servants' salaries would have raised the security threat to Iraqis and Americans and cost more lives.

In addition, he said the Iraqi ministries had no regular payroll systems and the "system had been corrupted beyond repair by decades of cronyism and ad hoc fixes".

Responsibility

The auditors said they understood the occupation authorities were working in a dangerous environment but it had a responsibility to ensure Iraqi ministries had basic financial controls before they were entrusted with handling such large amounts of money.

"The fact that the Iraqi ministries ceased to or had never functioned, lacked basic tools and operated in a cash economy was precisely why the CPA should have provided oversight of the financial management of the funds."

A review of 10 payments made by the occupation authorities Comptrollers Office between October 2003 and June 2004 found none of them - ranging between $120 million and $900 million - included documentation such as budget spending plans.

In another example, about $1.5 billion in cash allocations was made to Iraqi banks between January and April 2004 for operating expenses, yet spending plans supported only about
$498 million in these expenses.

The US Department of Defence also rejected the findings and said the "sweeping and unqualified conclusion" was not accurate. 

One of the main benefactors of Iraq funds was Texas-based firm Halliburton, which was paid about $1.7 billion dollars out of those funds to bring in fuel for Iraqi civilians.

UN auditors have asked for a full accounting of these funds.