Dallago on Monday denied any wrongdoing.
State Auditor Hector Balderas said the county has deficient purchase controls and lacks conflict of interest policies.
"I'm very concerned that thousands of dollars were paid to the county chairman's company in violation of state law," Balderas said in a prepared statement. "Every government official and employee who violates procurement laws should be held accountable to taxpayers."
A state audit found average expenditures from the county to Gallup-based Dallago Corp. grew to $259,000 annually while Dallago was chairman.
Dallago, in an interview Monday, denied any wrongdoing.
"We've been investigated I don't know how many years, but it's always been proved good," he said. "I'm not worried about it."
Dallago said his company has done work for McKinley County for decades, dating to when his father, David Dallago Sr., ran the firm. The elder Dallago likewise served on the county commission.
Many of the state auditor's findings concerned Dallago Corp. contracts for heating and cooling and plumbing work. The contracts were awarded through competitive bidding, Dallago said.
"Everything has been above-board," he said. "Jobs have been bid out, and I've bid them."
The state audit found the county paid Dallago Corp.
Balderas also criticized McKinley County for refusing to provide a final report of a county-conducted investigation into the procurements.
"I'm extremely concerned that the county was not fully transparent during this lawful audit process," Balderas said.
Balderas said because the special audit indicates violations of state law, he will refer the report to the 11th Judicial District attorney, the attorney general and other state law enforcement agencies.
Dallago Corp. offers construction, engineering and maintenance services. The company has done work for Central Consolidated School District and private firms in the Farmington area, Dallago said.
County Manager Richard Kontz on Monday called for Dallago to resign. "I hope you will accept responsibility for your actions," Kontz said in an email message. "It would be nice if you simply make a graceful exit from public service."
Kontz said he grew uncomfortable with the county's procurement processes after he was hired in August 2011. In March 2012, he asked the state auditor to investigate.
County staff are relieved to have the findings published, Kontz said.
"Having dealt with this situation over several months we at the staff level have been walking on eggshells ... so you can imagine the relief it is to have this audit report finally issued and available for public review," he said.
Kontz called the allegations the "highest violation of public trust."
"The biggest problem for employees is when they see elected leadership not complying with their own policy," he said. "Nothing destroys morale and trust among the employees more quickly than when there is hypocrisy in leadership."