Former leader Cyril Stevens (Lab) used his position to secure benefits and discounts in breach of the council's own rules and the code of conduct for councillors, the commission said.
Mr Stevens, who resigned as leader at the end of March on health grounds, also intervened inappropriately in day-to-day decision making and bypassed chief
officers in an attempt to manage issues directly, according to the report.
'As a result, systems of corporate control and proper decision making, which underpin good governance, have broken down,' said district auditor Phil Jones.
Commission chair James Strachan said the report highlighted areas in need of urgent attention.
'The current financial and operational problems would challenge any council, and unfortunately Erewash does not have the capacity to tackle them,' he said.
Tony Harris, head of executive office at Erewash, said the council had launched an eight-point plan which he said would address the commission's criticisms and pave the way to a 'more productive, positive and successful' future.
But John Brown (Con) said the council's leadership had become 'tainted', and that changes at officer level were essential if the council was to avoid intervention.
'We haven't reached Doncaster level yet, but you can't help thinking about it,' he said.
'It seems the more senior an officer was, the readier he was to cover things up. How can we convince the commission we are sorting things out when the people in charge are those who were heavily criticised?'