Orkney Islands Council faces a “significant” funding gap of £27 million over the next four years, auditors have found.
The Accounts Commission said that the local authority is delivering high-quality services but it must plan ahead for a financially sustainable future.
Serving around 22,000 people, Orkney Islands Council was noted to have relatively high costs and difficulty in recruiting and retaining staff.
An Accounts Commission report said the council had a “clear strategic direction” but it needed more urgency in its managing of capital projects.
Ronnie Hinds, chairman of the Accounts Commission, said: “Orkney Islands Council benefits massively from its rich natural resources and the legacy of its significant Strategic Reserve Fund, with money available to benefit the Orkney Islands and its local people.
“But facing a significant funding gap, the council needs to face reality and halt the unplanned depletion of reserves.
“We need to see a robust plan delivered this year on how reserves will be used, to achieve lasting changes for local communities and future generations.
“A vital part of this will be continuing consultation with island communities.”
Conservative islands spokesman Jamie Halcro Johnston said: “Orkney Islands Council is not alone in facing significant challenges, after years of systemic underfunding and neglect by an increasingly authoritarian and centralising SNP government.
“The most recent blow has been Humza Yousaf’s failure to provide the real matched funding promised as a result of his unilateral announcement of a council tax freeze – without having given any thought to where the money would come from, or how essential services would be maintained.
“Orkney is lucky to have considerable natural resources and an enterprising and energetic population, but the shortfall as a result of the SNP’s economic mismanagement, and which this report highlights, remains a serious concern.”
Heather Woodbridge, depute leader of Orkney Islands Council, said: “Orkney Islands Council welcomes this external independent scrutiny by the Accounts Commission reporting on our performance and strategic direction as a local authority.
“The report commends the council on delivering a high-quality service which is valued by communities across Orkney, whilst highlighting budget challenges in the years ahead.
“It will now be for elected members to consider the findings of the report and decide on the necessary actions in committee.”