The allegations are part of a recently unsealed 2008 federal lawsuit filed by Brad and Melan Davis.
Melan Davis, who said she handled record-keeping and billing for the firm, claimed that she found that a prostitute in Afghanistan had been placed on Blackwater's payroll under the "Morale Welfare Recreation" category.
She also said in the wake of Hurricane Katrina, Blackwater excessively billed the American government and even charged them for strippers which were billed as "cleaning services."
The U.S. government "has been damaged in the amount of many millions of dollars in funds," the suit alleges.
An audit released last year found that the State Department could have been able to recover $55 million from Blackwater because the company didn't provide the personnel necessary to fulfill its contract during the months examined in 2006 and 2007.
Melan Davis has been fired from Blackwater and is fighting her dismissal.
Her husband, Brad Davis, also claims that he witnessed acts of excessive force by company workers in Iraq including three cases in 2005 in which company workers used excessive force to "kill or seriously injure innocent Iraqi civilians," but that the company did not stop to see whether the targets of the shootings were alive or injured.
Blackwater or its workers have also faced federal probes for shootings in Iraq and Afghanistan and accusations of arms smuggling.
Mark Corallo, a spokesman for the Moyock, N.C.-based company, which has since changed its name to Xe, said Thursday that the lawsuit is misguided and noted that the Justice Department declined to join the case.
"The allegations are without merit and the company will vigorously defend against this lawsuit. It is noteworthy that the government has declined to intervene in this action," he said.