Kids Company collapsed because of an “extraordinary catalogue of errors”, MPs said in a highly critical report today, which recommends “radical” changes to charity regulation and government grant giving.
The report, The collapse of Kids Company: lessons for charity trustees, professional firms, the Charity Commission, and Whitehall concludes an inquiry by the Public Administration and Constitutional Affairs Committee into Kids Company and its relationship with Whitehall.
The charity collapsed in the summer, shortly after the Cabinet Office gave it a £3m grant against the advice of civil servants.
The report concludes that governance failings were at the heart of the charity’s problems and that ultimate responsibility must rest with the trustees, who failed to build up reserves and protect beneficiaries in the long term.
Today's report echoes another PACAC report, published last week, which blamed trustees for governance failures leading to a loss of public trust in fundraising.
The report also says three audit firms who had been involved with the charity should have picked up on issues sooner. It criticises successive governments for awarding grants through non-competitive processes and the Charity Commission for not intervening sooner.
Bernard Jenkin, chair of the committee (pictured), said: “In the course of this inquiry the committee has heard what can only be described as an extraordinary catalogue of failures of governance and control at every level: trustees, auditors, inspectors, regulators and government.
“There appears to have been a catastrophic confluence of factors that have conspired to allow this charity to operate as it did, for as long as it did. I fear the repercussions of this episode are far from played out, but one of them must be a radical change in our approach to charity regulation at every level.
“When this level of public funding is involved, government must have the skills and expertise to assess and hold funding recipients to account itself, and the Charity Commission must have the powers and resources to visibly, proactively investigate and tackle mismanagement.”
Recommendations for government
PACAC criticised the government's grant giving processes. It said the charity had received a number special grants and had been granted exemptions from reporting processes. It said these grants “distorted expectations” and urged the government to review how grants to charities are made.
“In allowing an unconventional relationship and funding process to develop, successive governments left themselves vulnerable to misunderstandings – wilful or otherwise – on the part of the charity, about the level of support that Kids Company could expect to receive from government in the future,” it said.
It added that Camila Batmanghelidjh, the charity's chief executive, “appeared to captivate some of the most senior political figures in the land” meaning that “objective judgments about Kids Company were set aside”.
The report recommends that the Cabinet Office should not control grants to charities, and said that should instead be the job of relevant departments. It questioned whether it was wise to move youth policy from the Department for Education to the Cabinet Office.
“As the Cabinet Office is the department most closely under the Prime Minister’s control, the existing structure leaves the Prime Minister exposed to the kind of pressures which Kids Company thought it could exert,” the PACAC report said.
The report highlighted the Libor fund, through which the Chancellor of the Exchequer makes grants to charities of fines received by government from banks which manipulated interest rates.
The report said the government “should consider whether sufficient safeguards are in place to ensure that the Libor fund is administered in line with these principles of objectivity and transparency”.
PACAC also called for charities which get government grants to have “legally defensible contingency plans” to “mitigate the risks of a charity with vulnerable beneficiaries folding unexpectedly”.
It also criticised Oliver Letwin, who overruled officials to make a final grant to Kids Company shortly before it closed.
“We are concerned that the Cabinet Office was prepared to hand over money, on a minister’s say so, against official advice, to an organisation in which serious allegations had not been fully investigated,” the report said.
Recommendations about trustees and charities
The report says that large complex charities need a board which “will demonstrate leadership, judgment and a willingness to challenge assumptions”.
Board papers seen by the committee revealed that in November 2014, when the charity was in financial trouble, Camila Batmanghelidjh turned down an offer of support from a philanthropist because in her opinion the philanthropist “lacked emotional authenticity”.
PACAC said this incident “underlines how unaccountable and dominant trustees had allowed her to become, and how far she was able to insist on maintaining personal control”.
The committee also said: “There was a clear link between the failure to correct serious weaknesses in the organisation, and the failure to refresh its leadership.”
Recommendations for the Charity Commission
PACAC recommends that the Charity Commission provide more guidance on making sure that trustee boards have people with the “relevant experience” and a “range of skills”.
It urged government to make sure that the Charity Commission is properly resourced so that it can “advise and investigate charities at an earlier stage and to support charities through restructuring and downsizing”.
In relation to the complaint made about the way a donation to Kids Company was handled by the regulator, with the charity and the regulator giving different accounts of the incident, MPs said that in future the Charity Commission “must communicate any advice to a charity in writing, even if there has been no illegal activity on the part of a charity”.
Recommendations about auditors
The report is critical of three audit firms who had been involved with the charity towards the end.
“All three professional firms identified matters of concern relating to Kids Company, yet not one of them reported the scale of risk carried by the charity to the trustees, the Cabinet Office or Charity Commission,” the report said. And warned that professional advisers are “no substitute for the exercise of judgment”.
Of Kingston Smith, which was the charity’s auditor and signed of its accounts each year, the report said: “It is surprising that Kingston Smith did not consider its duty to alert the Charity Commission to the extremely high risk of failure in this charity.” And that the firm was “over-confident” in the charity’s internal control.
PACAC said that PKF LittleJohn, which had been appointed by the Cabinet Office to provide assurances on the charity’s governance structure, did not look deep enough and that both the auditor and the Cabinet Office were to blame for the limited scope of the report.
It said that a preliminary report into the charity, compiled by PwC, “was of little value” as it had been completed too quickly.
PACAC suggests that the Commission should revise its guidance for auditors to “be clearer on the circumstances in which auditors should pass on concerns”.
It also said that government relied too heavily on advice from external firms and said that government departments should see a charity’s management letters.
Recommendations for further regulation
PACAC said Ofsted or the Care Quality Commission should be responsible for regulating charities that provide services to children and vulnerable adults.
It said: “There are a number of safeguarding issues which have come to PACAC’s attention during the conduct of this inquiry into Kids Company, most of which neither a select committee, nor the Charity Commission, nor a government department could be expected to resolve.”
Response from government
The Cabinet Office has launched a detailed view of how it makes grants under section 70 of the Charities Act, which is being carried out by Rob Wilson, minister for civil society. The Grants Efficiency Programme is also undertaking a government-wide review of all existing practice relating to grant giving.
Oliver Letwin said: “As I said to the Committee I believed it was the right thing to do to give this charity one last chance to restructure.
"We will of course pay careful attention to this report and in light of what we now know about Kids Company we will be reviewing our grant-giving process.
"Charities across the country do important work transforming people's lives and strengthening communities, and they are well placed to deliver publicly funded services. By updating the process by which grants are awarded we will make sure the most stable, most effective charities receive taxpayer funds."
