Leaders of a North-East political lobby group have been reprimanded by the district auditor after allegations they used taxpayers' cash to promote a regional assembly.
Anti-home rule campaigners complained the North-East Assembly had used public funds to argue the case for a directly elected assembly.
And in a letter to North-East Against a Regional Assembly campaign leader Neil Herron, district auditor David Jennings told him his concerns "appear to have foundation".
The NEA receives some of its funding from 25 local authorities via the Association of North-East Councils. Local government laws and code of conduct state taxpayers' money should not be used to promote a particular political view.
In February, Alnwick District Council suspended its annual £5,000 subscription to the Association of North-East Councils after the NEA claims came to light.
Mr Jennings wrote: "So far as I can see, some of the publicity issued by NEA could be seen to be contravening Part II of the Local Government Act 1986 and DoE Circular 20/88 - Code of Recommended Practice on Local Authority Publicity. The Code specifically states that public funds should not be used to mount publicity campaigns whose primary purpose is to persuade the public to hold a particular view on a question of policy."
He said: "It seems to me that elements of the NEA publicity could be interpreted as being designed to be persuasive rather than informative on a question of policy and as such would contravene the publicity code."
The auditor continued: "It could be argued that unlawful expenditure has been incurred by contributing authorities" but he did not believe it was in the public interest to take any legal action.
But he did add that "it seems there was a clear intention to ensure compliance with statutory requirements but unfortunately this was not achieved in some instances."
Last night Mr Herron called on assembly chairman Tony Flynn, vice chairman Bob Gibson and director Stephen Barber to consider their positions.
He said: "I believe the chairman, the deputy and the director of the assembly should resign.
"Will anyone have faith in an elected regional assembly if the unelected one has behaved in such a manner?"
Mr Barber said: "We are disappointed that the district auditor should conclude this because our intention all along has been to inform the public."
Mr Barber said the Assembly's website had been updated and all material would now be double checked for compliance.
He also said only a small amount of the publicity had come from funds provided by local authorities and the remainder from cash under the Government's Strengthening Regional Accountability initiative.
Asked about his position, Mr Barber said: "This is a political campaign he (Mr Herron) is running and it should be seen in that context. I am happy that our intention throughout this whole process was to put out material to help the public get up to speed on regional government."
NEA chairman and Newcastle City Council leader Tony Flynn was not available yesterday. NEA vice chairman Bob Gibson, leader of Stockton Council, did not wish to comment.
Mr Jennings said auditors for all authorities involved would be writing to them to "seek an agreement that appropriate steps will be taken to ensure that any publicity material issued by NEA comply fully with statutory requirements".
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