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The public spending watchdog for Wales is conducting a special inspection of Caerphilly council after a report highlighted "significant failings".

The Wales Audit Office (WAO) said the council had improved the way it worked since it was asked to look at the way bosses were awarded pay rises.

But weaknesses were identified in the way the council managed its people, information and assets.

The council said it accepted the findings of the WAO report.

Former chief executive Stuart Rosser was brought back in as interim boss of the council in July.

He left the authority in 2010 but returned to replace Anthony O'Sullivan who, with his deputy, was suspended as police investigate pay rises for senior staff.

In March the WAO auditor concluded that the council had "acted unlawfully" with regards to its pay-setting process, and made several recommendations.

The council was holding its own disciplinary investigation as a result of that report. The investigation is on hold pending a police investigation.

Meanwhile, the WAO annual improvement report published said there were significant failings in the council's governance arrangements "requiring a special corporate governance inspection" later this year.

It added: "The council's progress against regulators' recommendations is mixed and often slow.

"Encouragingly, it has accepted that accountability arrangements to manage and deliver the findings from audit and inspection work need to be strengthened, but these arrangements have not yet been put in place.

"Although the council has to date responded to the financial challenges it has faced and secured savings in advance of need, it does not have a rigorous approach to developing business cases or to setting, delivering, monitoring and evaluating savings in order to meet future demands and challenges."

It called on the council to "address weaknesses in its approach to self-evaluation and challenge, and report and account for its performance in a more balanced and transparent way".

Alan Morris, group director of the Wales Audit Office told ´óÏó´«Ã½ Wales: "It's a mixed picture - some services are improving, some are in need of improvement, some are performing well.

"But the most significant findings are in relation to the council's governance arrangements where we found some significant weaknesses.

"Mainly, these issues stem from a report published by the appointed auditor earlier this year where he found in setting the pay of senior officers, the council had inadequate processes and procedures which led it to take an unlawful decision.

"Our wider work has shown that this is symptomatic of wider weaknesses in the council's processes, procedures and arrangements around decision making and governance."

In a statement, Mr Rosser said: "We acknowledge and accept the findings of the annual improvement report and I can confirm that work is already well under way to address many of the issues raised in the document.

"I am confident that the council will be able to manage these issues successfully thanks to our excellent workforce and the ongoing support of members.

"I would like to assure residents that we are moving forward as an organisation and our focus remains on delivering efficient and effective services to all sections of the community."

Caerphilly council leader Harry Andrews said: "We are obviously disappointed with some of the issues raised in the annual improvement report but I have full confidence in our excellent workforce and I know that steps are already being taken to address some of the concerns that have been highlighted."