BAGHDAD (Reuters) - The U.S. Department of Defense was unable to account properly for $8.7 billion of Iraqi oil and gas money meant for humanitarian needs and reconstruction after the 2003 invasion, according to an audit released on Tuesday.

Residents gather at the Shorja wholesale market during a sandstorm in Baghdad, June 7, 2010. REUTERS/Saad Shalash

The figure is nearly 96 percent of the $9.1 billion funneled to the Pentagon from the Development Fund for Iraq (DFI), said the audit report from the U.S. Special Inspector General for Iraq Reconstruction (SIGIR).

The report described lax management of some of the billions of dollars designated for rebuilding war-shattered Iraq, where residents routinely complain about lack of electricity and other basic services more than seven years after the invasion.

The DFI was established by the Coalition Provisional Authority, the U.S.-run body that took charge of Iraq following the invasion.

It was meant to harness money from export sales of oil, petroleum products and natural gas, as well as frozen Iraqi assets and surplus funds from the U.N. oil-for-food program, and spend it for the benefit of Iraqis. The U.N. Security Council approved the creation of the fund.

“Weaknesses in DoD’s financial and management controls left it unable to properly account for $8.7 billion of the $9.1 billion in DFI funds it received for reconstruction activities in Iraq,” the SIGIR report said.

The report cited poor record-keeping and said most of the organizations at the Pentagon that received DFI funds failed to establish required Treasury Department accounts.

“Our selective review shows the records were not always complete. For example, DoD could not provide documentation to substantiate how it spent $2.6 billion,” it said.

The government of Iraq ordered the Pentagon to return DFI funds at the end of 2007. But the audit found Department of Defense organizations that were still holding and in some cases spending DFI funds.

“The breakdown in controls left the funds vulnerable to inappropriate uses and undetected loss,” the report said.

Iraq is almost completely reliant on oil revenues to rebuild infrastructure and housing stock devastated by years of war and economic sanctions. More than 95 percent of the federal budget comes from the oil sector.

The audit report said the Pentagon had agreed to adopt and implement by November the inspector-general’s recommendations to tighten up financial controls.

“SIGIR believes the identified actions, if implemented as planned, will address SIGIR’s concerns,” the report said.