The report specifically questions whether any abuses or crimes allegedly committed by some contractors may have already damaged the US military's efforts to win over the "hearts and minds" of local Afghans.
Both reports come amid waning US public support for the war in Afghanistan, following the deadliest month so far for US forces in the country.
A growing chorus of US critics have said the Obama administration's policies in Afghanistan are failing to keep pace with the deteriorating security in the country.
General Stanley McChrystal, the most senior US general in Afghanistan, called on Monday for a new strategy and "increased unity of effort" if the US mission is to succeed.
According to the POGO report, private security guards at the US embassy in Kabul are understaffed, ill-equipped and poorly managed.
"These are very serious allegations and we are treating them that way"
US State Department spokesman
Nearly 1,000 US diplomats, staff and Afghan nationals work at the embassy.
In a 10-page letter to Hillary Clinton, the US secretary of state, POGO cited a number of shortcomings with the security contractor, AmorGroup North America, including cases of hazing of new recruits and lewd, drunken conduct by supervisors.
The company provides security for the US embassy under a five year $189m state department contract that was extended in June.
The letter said that among the 450 guard employed by the firm to provide security at the embassy, about 150 are Americans or from other English-speaking countries, while the remaining 300 were Gurkhas from northern India and Nepal who speak little or no English.
'Lord of the Flies' environment
The group said the language barrier between English-speakers and Gurkhas was so severe it would be difficult for them to communicate in a crisis.
It also cited a "Lord of the Flies" environment" among some English-speakers at the camp where the men are stationed, marked by hazing of recruits, drunkenness and lewd conduct.
"These are very serious allegations and we are treating them that way," Ian Kelly, a spokesman for the state department, said when questioned about the POGO report.
"We've been investigating this organisation for some time now," he said. "We have pointed out to them some of the deficiencies."