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Their right to do so was challenged by the Central Otago Environmental Society, which expressed concern about some councillors having a conflict of interest on water issues.
Water policy was central to the campaign to oust Ms Hobbs, the society argued.
The Office of the Auditor-general rejected the society’s argument.
“We cannot see that any councillors would have a personal financial interest in who the council chair should be," the office said in a statement.
"Nor can we see that the other forms of bias or predetermination alleged by the society would arise in the matter of who is best placed to chair the council.
"Councillors are entitled to consider as a group who is best placed to chair the council and to have their own views on that."
Ms Hobbs faces a vote tomorrow morning on whether she should be removed as chairwoman after nine councillors sought an extraordinary meeting.
If councillors vote her out, they can decide on her replacement.
Cr Gary Kelliher said all councillors being allowed to vote was "a sensible outcome, as we all expected".
The challenge from the society was "an extremist approach by an extremist lobby group", he said.