It says the council failed to follow standard practice in sharing out the cost of collecting council tax and water charges. It says the council should have divided up the costs in proportion to the total amount collected.
But Lothian divided up the costs equally between the two accounts. This raised the level of water charges and freed money collected from the council tax to fund services.
The commission says the council should have taken £9.9 million from the general fund instead of £4.1m in 1993-94, and £8.6m instead of £4.7m in 1994-95.
The commission has qualified the accounts but will not force the treatment of costs to be reversed.
Pressure is now on Edinburgh City Council, which is responsible for closing Lothian RC's accounts for the final year of the council, to decide how to account for the collection costs.