Rotherham Council is to face an independent inspection following the report that revealed 1,400 children were sexually abused in the town.
Local Government Secretary Eric Pickles said the inspection would examine whether the council covered up information about the abuse.
It comes after the council's chief executive told MPs key reports relating to abuse had disappeared.
Mr Pickles said an inspection was "in the public interest".
He said the inspection would be led by Louise Casey, the head of the government's troubled families programme, and would examine the council's governance, services for children and young people, and taxi and private hire licensing.
The report into the abuse of children had highlighted the alleged involvement of some taxi firms in transporting some victims.
Mr Pickles said the inspection would examine whether the council takes steps to ensure only "fit and proper persons" are permitted to hold a taxi licence.
It will also examine whether the council "was and continues to be subject to institutionalised political correctness affecting its decision-making on sensitive issues", he told MPs in a ministerial statement.
The report by Professor Alexis Jay, published two weeks ago, detailed how children had been subjected to trafficking, rape and other sexual exploitation over a 16-year period and how their abuse had been ignored by a range of agencies, including police, councillors and council officials.
Mr Pickles said: "With clearly documented failures by the council on so many levels, the rare step of a statutory inspection is in the public interest.
"We cannot undo the permanent harm that these children have suffered. But we can and should take steps to ensure that this never happens again and make sure that all local authorities deliver on their essential duty to protect vulnerable children."
He said Ms Casey had been asked to report to him by November and if the inspection showed the council was failing, he had the power to intervene directly.
The announcement of the inspection comes after a barrage of criticism of both Rotherham Council and South Yorkshire Police following the publication of the Jay report.
Council leader Roger Stone has already quit and the chief executive, Martin Kimber, announced he would stand down in December on Monday.
However, South Yorkshire's Police and Crime Commissioner Shaun Wright, who was in charge of children's services in Rotherham from 2005 to 2010, has refused to resign.
The council's current head of children's services, Joyce Thacker, has also resisted calls for her to quit.
Rotherham Council's Labour cabinet has been dissolved and the Local Government Association has been asked to establish an "independently-chaired improvement board".
South Yorkshire Police has commissioned an independent investigation into its handling of the abuse scandal.