Middlesbrough Council has been strongly criticised in a report, which warned that "urgent action" is needed, or the government may need to step in.
The local MP has called for the town's mayor Andy Preston to resign.
Mr Preston has insisted progress is being made.
An audit by Ernst & Young found there were significant weaknesses at the council in a number of areas.
It noted how:
A publicity advisor to the town's mayor was employed unlawfully between October 2019 and November 2020 at a cost of £32,000
The council bought some Covid-19 tests which were not authorised for use in the UK, outside of its normal procurement processes
There is a "pervasive lack of trust" between elected councillors and staff
Middlesbrough Labour MP Andy McDonald told us: "This is a devastating report. It sets out what is a collapse of governance in Middlesbrough.
"Andy Preston is not fit to be the Mayor of Middlesbrough, and he should step down."
Mr Preston, who leads the council as an independent, told us: "Bad cultures take a long time to fix - but we're really getting there. Behind the scenes there is an awful lot going on - positive change."
The auditors said there are "deep rooted cultural and relationship issues at the council which require urgent action."
They have asked the authority to draw up an improvement plan, and said they would follow up within the next six months.
They warned that, if they were unsatisfied with progress, they would consider involving the government.
A Department for Levelling Up, Housing & Communities spokesperson said: "We are aware of the concerns raised about Middlesbrough Council’s governance and will remain in close contact with the council."