Tower Hamlets council failed to "comply with its best value duty" and had a "lack of transparency" over its grant awards, according to PricewaterhouseCoopers.
The report from the professional services firm, which was commissioned by the UK government, comes after allegations of fraud at the local authority, which is led by directly elected mayor Lutfur Rahman.
PwC said there is a "lack of transparency" over the rational for decisions to grant awards and claimed grants have been awarded to organisation that were ruled "ineligible" or which did not meet "the required evaluation score".
In addition, the professional services firm said there are "gaps" in the monitoring performance of grant recipients from Tower Hamlets.
The local authority also failed to comply with its "best value duty" in relation to three of the four property relations PwC looked at in detail – Poplar Town Hall, Sutton Street Depot and Mellish Street.
But PwC said it did not ascribe any particular failure to any particular individual when it came to governance.
"However, the failures identified demonstrate that, as a whole, the existing governance arrangements have weaknesses which have resulted in these failures not being prevented," the report said.
The £1m ($1.6m, €1.2m) report, commissioned by the Secretary of State for Communities and Local Government Eric Pickles, came after an investigation by BBC current affairs programme Panorama alleged the council favoured Bengali organisations when awarding grants.
Pickles is expected to make a formal statement on the report in the House of Commons at 12.30pm on 4 November and may announce sanctions against Tower Hamlets.
Tower Hamlets had not responded to a request for comment at the time of publication.
A Tower Hamlets Council spokesperson told IBTimes UK: "Whilst the PwC report identifies some process and governance issues that needed to be improved the council notes that no evidence of criminality or fraud has been identified by the government appointed forensic auditors.
"In our view there is no evidence that these flaws of process are 'regular or endemic' meaning that there is no failure to comply with our best value duty.
"We await the government's reaction to the report but we urge the Secretary of State to act proportionately and to acknowledge the steps we have already taken to tighten up processes as well as the high performing nature of the council's services."