Local authorities will be required to make "substantial savings" over the next four years, with choices on how to address funding gaps becoming increasingly difficult, Audit Scotland said.
Its report for the Accounts Commission on an overview of local government in 2014 said that so far, savings have been made mainly by cutting staff numbers - but this measure is not sustainable in the longer term.
The financial position of Scotland's 32 councils, who collectively spent almost £21 billion in 2013, has also highlighted the need for "strong political and managerial leadership".
The report identified "heightened tensions" in some council chambers which is "leading to strained working relationships".
Problems were identified at Argyll and Bute, Falkirk and Aberdeen.
Such tensions threaten effective leadership, and the council's ability to do business effectively and achieve best value for services, the report said.