The report from the National Audit Office, the public spending watchdog, accuses the council, which operates the Bisham Abbey, Lilleshall and Crystal Palace sports centres, of not doing enough to avoid potential conflicts of interest.
It is almost certain to lead to widespread changes at the council, which is already in discussion with the Government over how to simplify its management structure.
Last year, said the NAO, the council had a total income of more than pounds 50m, of which pounds 48.8m came directly from the Government. However, despite employing only 434 people, more than pounds 20m was absorbed by staff salaries and other administrative costs, leaving just pounds 31.2m to be handed out in grants to sports groups.
The council is chaired by Sir Peter Yarranton, former president of the Rugby Football Union, and includes among its other 12 members the current RFU president, Ian Beer, Trevor Brooking, the former England footballer, and the Olympic gold medallist, Mary Peters.
Hayden Phillips, permanent secretary at the National Heritage department, which oversees the council, will be questioned on the severely critical report by the Commons Public Accounts Committee next month. MPs are expected to ask why the 14 council members claimed more than pounds 115,000 in expenses last year.
The council justifies the administration costs on the grounds that it is a countrywide organisation which supports many local authorities and voluntary bodies. It justifies the level of members' expenses on the grounds that their work involves a large amount of travel.
The NAO's main criticism centres on the setting up by the council of various subsidiary organisations to manage its assets. This complex structure, the report says, was ill-conceived and not thought through.
The main subsidiary was a charitable trust called the Sports Council Trust Company. Under charity law, its directors have a duty to act in the best interests of the charity and not the council. This, says the NAO, created a potential conflict of interest. For instance, if the assets were sold there was nothing to force the directors to pass the proceeds on to the council.
While no impropriety was discovered, the NAO accuses the council of lax management.
A company called Sportspartner Limited was another major subsidiary. The watchdog found that the council's then director general, David Pickup, and finance director, Ian Johnson, set up Sportspartner without the council's formal approval. This was given only 12 months later.
Sportspartner was a consultancy and event management business. The Government ordered that any such venture had to be operated independently of the council and was not to be subsidised, yet council staff were told to include it on the shortlist for all competitive tenders.
When Johnson resigned as finance director of the Sports Council he immediately joined Sportspartner as its head. The council agreed to pay Sportspartner pounds 500 a day, or pounds 36,000 over four months. That contract, said the NAO, was signed on behalf of the council by Pickup, who was also a non-executive director of Sportspartner.