A scathing report into the running of one of Scotland's biggest city councils concluded that it needs to bring in outside help to cope with major problems in its management, finances and delivery of services.

The Accounts Commission report on Aberdeen City Council makes devastating criticisms of the local authority. It recommends a complete organisational overhaul and the appointment of an all-party board to help the council recover.

The findings follow a two-day public hearing held earlier this month into concerns raised by Audit Scotland over the council's finances.

The council had announced a £27million cut in its budget, which threatens to hit vulnerable groups such as the elderly and homeless and has sparked a wave of local protests. Douglas Paterson, the council's chief executive, announced on the opening day of the inquiry that he will stand down early.

The Accounts Commission has in an unprecedented move called for the appointment of an independent expert in local government finance to establish whether planned savings are accurate and achievable.

It has also called for all big property transactions to be signed off by both the chief financial officer and a monitoring officer to ensure proper accountability.

The commission does not believe the council has the capacity to bring about necessary changes while managing its budget and financial position. For this reason, the council should call in external help.

The commission is concerned that the council, which is run by an SNP/Lib Dem coalition, believes it is fit for purpose, even though reports by school inspectors and the Social Work Inspection Agency suggest that the authority's two biggest services lack leadership and direction.

It says that there is a “fundamental morale problem” among many employees and accuses the council of failing to engage with them in making changes.

The council's finances, says the commission report, are in a precarious position and over the past three years the council's expenditure has been significantly in excess of its budget, giving rise to concern over diminishing reserves and leading to the need for substantial savings in the financial year. It adds: “Given the previous record of failure to meet savings targets, we cannot have confidence that these savings will be delivered and we accordingly make recommendations regarding the close and frequent monitoring of the position.”

John Baillie, chairman of the commission, said: “It is essential that the council accepts the seriousness of its circumstances, pulls together and acts quickly and decisively to implement our recommendations.

“It will need specialist support from outside the council to do this.”

Kate Dean, the council leader, refused to resign over the criticisms: “The public have to put their hope and trust in the people they elected. They are the people who will take things forward with expert advice.”

But John Swinney, the SNP Finance Secretary, gave warning that he would take action if matters did not improve. In a letter to Ms Dean, he also said that he wanted regular progress reports from the council.

Nicol Stephen, the Scottish Lib Dem leader and MSP for Aberdeen South, said: “The report sends out a clear message that all politicians on the council have a major role to play in turning the situation around.”