Scotland Yard has been asked to look at allegations of fraud and financial mismanagement made against an elected mayor.
Communities Secretary Eric Pickles is also sending in inspectors into Tower Hamlets in east London to investigate the activities of Lutfur Rahman.
The Bangladeshi mayor is alleged to have more than doubled funding recommended by officers for Bengali-run charities in an attempt to buy influence.
Mr Rahman has denied the accusations, which were made in a BBC Panorama documentary.
Mr Pickles said serious concerns had been raised and PricewaterhouseCoopers is now on site to carry out an inspection of the council. A file is being passed on to the Metropolitan Police today.
He said: "It is a matter of public record that I have long been concerned about a worrying pattern of divisive community politics and alleged mismanagement of public money by the mayoral administration in Tower Hamlets.
"Following the receipt of a number of documents, I am now taking legal steps, in the public interest, to appoint inspectors to look into the allegations in respect of Tower Hamlets.
"I hope this sends a strong signal that robust processes are in place to investigate allegations of failures in financial management and governance in local government, under the new regime introduced by the Local Audit and Accountability Act which replaces the Audit Commission.
"This central action is not undertaken lightly, but localism requires local transparency, scrutiny and accountability, and these vital checks and balances must be upheld."
Mr Rahman was accused by Panorama of increasing public funding to Bangladeshi and Somali groups from £1.5 million to £3.6 million in the face of officer recommendations.
The mayor has hit back at the allegations, which he claims are motivated by racism and Islamophobia.
Mr Pickles has asked inspectors to focus on grant payments, the transfer of property by the authority to third parties, publicity spending decisions and contractual processes since the mayor was elected.
PwC has been asked to report back to the Communities Secretary by June 30.
Tower Hamlets Council insisted it had "seen no evidence" that its processes had been run inappropriately.
A spokesman said: "Under an order introduced yesterday, Government auditors are today meeting with senior officers of the council.
"We welcome the opportunity to demonstrate that council processes have been run appropriately and to date we have seen no evidence to suggest otherwise.
"This inspection affords the borough the best opportunity to demonstrate that the borough has acted in the best interests of all residents. We will release further information in due course."
Shadow communities secretary Hilary Benn said: " Given the allegations that have been made over several years, and the material submitted to the Communities and Local Government Secretary, some of which has now been passed on to the Metropolitan Police, about the running of Tower Hamlets, it is clearly in the public interest to establish the facts.
"Nobody should prejudge the outcome, and anyone who has information must present it to the inspectors. This audit must, of course, be full, open and transparent in order to command public confidence."
The leader of the Labour group on Tower Hamlets council, Sirajul Islam, said: "Today is a sad day for Tower Hamlets. Whilst there are obviously serious questions to answer, no council wants to be the subject of scandal. Lutfur Rahman needs to reflect very carefully on the position he has put the council in.
"We have been warning about Rahman's style of leadership for a long time. It is clear, whatever else is happening, the only way to resolve this situation and restore our borough's reputation is to vote John Biggs in May's mayoral elections.
"Our focus now is to ensure that this process does not distract from the running of council services and that the needs of residents are put first."