The communities secretary, Eric Pickles, is to take over the administration of Tower Hamlets council, in east London, for two years after an inquiry commissioned by his department found evidence of a crony culture in which grants and properties were handed to favoured groups, and proper procedures were ignored.

Pickles is to dispatch three commissioners to oversee grant-giving, appointments, property deals and the administration of future elections in the borough.

The inquiry, conducted by accountants PricewaterhouseCoopers, found contracts were awarded without the appropriate paperwork while Lutfur Rahman, the independent elected mayor, personally selected preferred companies.

Pickles told the Commons that Rahman had dispensed public money like a “medieval monarch” and oversaw an administration that was “at best dysfunctional, at worst riddled with cronyism and corruption”. He said grants were distributed without rationale, clear objectives, monitoring or transparency.

Officers’ recommendations were systematically overruled, said Pickles, pointing out that across mainstream grants by the council, 81% of officer recommendations were rejected by councillors, and more than £400,000 was handed out to bodies that failed to meet the minimum criteria to be awarded anything at all. He added that Poplar town hall was sold, against official advice, to an individual who helped the mayor in his electoral bid.

Pickles said the report painted “a deeply concerning picture of obfuscation, denial, secrecy, the breakdown of democratic scrutiny and a culture of cronyism risking the corrupt spending of public funds”.

Pickles’ actions represent his biggest intervention in local government since he took over Doncaster council in 2010, but he insisted “there can be no place for rotten boroughs in the 21st century”.

His actions were largely supported by Labour, which removed Rahman as its mayoral candidate in 2010. He stood as an independent in 2014 in a bitterly contested election. Claims of intimidation in that contest are now being played out in an electoral court.

Pickles was brutal in his condemnation of Tower Hamlets’ ruling councillors, saying: “The abuse of taxpayers’ money reflects a partisan approach to politics that seeks to spread favours and sow divisions. Such behaviour is to the detriment of integration and community cohesion in Tower Hamlets and in our capital city. This is a borough where there have been widespread allegations of extremism, homophobia and antisemitism has been allowed to fester without proper challenge.”

It has been alleged that Rahman shored up his electoral base in the Bangladeshi community through grants, and the report finds evidence of grants heavily weighted to two or three wards in the west of the borough. PwC reported that many files were missing and the council did not fully co-operate with the inquiry. Some of Rahman’s evidence was at odds with documentary evidence, the report also found. The report also confirmed evidence of possible fraudulent payments has been reported by the council to the police.

The commissioners, who will be answerable to Pickles, will be in place until March 2017 and are tasked with drawing up an action plan to improve governance in the council, including the permanent appointment of three senior council officers including a chief executive. The council has had no chief executive for years.

In a statement released before Pickles’ remarks in the Commons, Rahman said: “In April 2014, Eric Pickles announced that he was concerned about potential fraud and the Evening Standard ran these claims on its front page. These allegations have been rejected by PwC. The report highlights flaws in processes. These are regrettable. We will learn from this report and strengthen procedures. I was always confident that wild claims about fraud would not be substantiated. Both my officers and I want to get on with our jobs serving all residents in Tower Hamlets.”

Council officers said they were disturbed about the impact of the report on the local community, adding that grants were weighted to communities most liable to apply for funding . Council officers also suggested a judicial review into Pickles’s actions, including the commissioning of the PwC report, and the associated costs, is likely to go ahead on 14 November.

They also insisted the bar is set high for Pickles to prove the council has been so badly run that it needs in effect for a new level of independent scrutiny answerable to be introduced.

Pickles claimed his direct intervention was against everything he believed in, but he said the four-month, £1m inquiry, revealed Rahman had sown division, adding the findings should make Rahman bow his head in shame. Pickles said: “It seems to me that the mayor’s test is, ‘If you’re not actually caught with your fingers in the till, you’re innocent.’”

He proposed that all Tower Hamlets grant-making, property disposals and publicity functions should be sanctioned by the commissioners. He also announced that the commissioners would appoint the council’s electoral registration officer and returning officer.

In its initial response the council said it would comply with Pickles’s demand not to appoint officers or make any grants pending the start of his intervention. Pickles said he would not implement this intervention package for two weeks in order to give the council time to respond to his intervention package and the PwC report.

John Biggs, the Labour candidate defeated by Rahman in the spring mayoral election, said: “Lutfur now has nowhere to hide and should think very carefully about whether his actions are compatible with remaining mayor.”