A US House of Representatives committee heard about a litany of bogus claims and misuses of emergency payments intended for victims of hurricanes Katrina and Rita last year.
Gregory Kutz, managing director of special investigations at the General Accounting Office, which audits US government spending, said one billion dollars, or 16 percent of hurricane assistance payments, were fraudulent.
"We believe our estimate understates the magnitude of the problem," he told lawmakers.
While the Federal Emergency Management Agency acknowledged being tricked into funding hundreds of fraudulent schemes, it said it had only found evidence of fraud worth $16 million.
The audit found that diamond jewellery, champagne and erotic videos were bought using debit cards handed out by FEMA to displaced people.
In some cases, prisoners who were jailed when the twin hurricanes barrelled into the southern US coast billed the government for rental assistance.
And several supposed hurricane victims enjoyed months-long vacations at holiday hot spots in Hawaii and the Caribbean.
One supposed victim used a New Orleans cemetery as their home address, and another spent 70 days at a resort in Hawaii, even though they lived in North Carolina, hundreds of kilometres north of the devastated area.
Mr Kutz also said one person splurged on a $200 bottle of Dom Perignon champagne at a Hooters restaurant, and others spent hundreds of dollars on adult erotica.
In another scheme, a fan ordered five season tickets for the New Orleans Saints American football team, and one "victim" spent $1,000 on a divorce lawyer.
"I am appalled at this. I want something done about this," said Michael McCaul, chairman of the House Homeland Security Committee's sub-committee on investigations.
"This has to stop. I don't even know where to start with all this."
Donna Dannels, FEMA acting deputy director of recovery, said many steps have been taken to close loopholes for the 2006 hurricane season.
Such eye-catching frauds represented only a small portion of the abuses of expedited assistance examined by the hearing, Ms Dannels said.
She also argued that the situation was so chaotic after Hurricane Katrina, which struck on August 29, 2005, inundating New Orleans, that the agency was overwhelmed. "We do have to put this in some sort of context," she said.