Stuart Bowen, chief reconstruction auditor, told the BBC that in addition to the violence, Iraq is facing a second insurgency in the form of corruption and mismanagement.
He estimated that corruption this year will reach $4 billion, or over 10 percent of the national income, with some of the money going to insurgents. He also said there are not enough skilled people to manage state funds.
"This money that's stolen doesn't merely enrich criminals," Bowen said. "(It) frequently goes out to fund criminal militias or insurgents. That means lost lives for U.S. troops."
The new military budget calls for the auditor's job to be cut by next October but Senators from both parties have vowed to extend Bowen's mandate, the BBC said.
Bowen's office has so far referred 25 criminal cases to the U.S. Justice Department, with four of them resulting in convictions for corruption.