Nick Reiter was dismissed by Shetland Islands Council in January after spending nearly half his eight month tenure in the job under suspension (LGC, 15 January).
He was paid£103,000 in compensation and expenses - which the commission has concluded was 'based on procedures which were unreasonable and a decision which was not properly informed'.
In a press statement, controller of audit Robert Black said: 'He was never advised what the complaints were and I remain unclear as to their nature. Also, the council made no effort to resolve any problems there were by conciliation and gave Mr Reiter no opportunity to improve his performance.'
He said he could not comment further until the commission has considered his report.
The council said members would meet in August to consider what response to make to the commission. 'Much of the report is drafted in terms of the opinion of the controller of audit and clearly matters of judgment and opinion rightly require time for consideration,' it said.
The case prompted Unison and the Convention of Scottish Local Authorities chief executive at the time, Douglas Sinclair, to call for extra protection for chief executives.
Mr Reiter was suspended over allegations that he had misled members about his role in the Westminster homes for votes scandal (LGC, 15 January). An independent adviser told members there was no evidence of misconduct but councillors in Scotland are not required to accept recommendations from an independent adviser. Mr Reiter could not be reached for comment.