Local Government Minister Rodney Hide says he has put Hamilton City Council on notice that the Government has its eye on it and will seek to replace it if necessary.
Last month a report from Audit New Zealand into the V8 Supercars event was critical of council management.
Mr Hide said he was concerned about the Audit New Zealand findings.
"The report highlighted a number of issues with the council's expenditure on the races, governance structures and reporting processes.
"It is crucial for local democracy that ratepayers have confidence in their councils. For that to happen, councils must have the right governance structures and delegations. Councils must maintain transparent and robust decision-making processes and act in accordance with the Local Government Act 2002 and other relevant laws.