Monitor has exercised its intervention powers for the second time since its creation with a formal notice to the Royal National Hospital for Rheumatic Diseases foundation trust.
The small specialist trust in Bath had to restate accounts in June to record an increase in losses from£40,000 to£650,000 in 2006-07 and£429,000 in 2007-08.
Monitor will review the trust's finances for 12-18 months. The trust must appoint PricewaterhouseCoopers to report on its financial control and commercial management.
Monitor said severe failings in financial management and control amounted to a significant breach of the trust's terms of authorisation.
The regulator also told the trust to "resolve the chief executive's position". A trust spokeswoman said there would be a statement at a later date on the position of chief executive Nicola Carmichael. The spokeswoman said: "Monitor is working with us to ensure we have robust financial processes in place."
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