The government should investigate why the Charity Commission "did nothing" about Kids Company and why departments funded a "clearly inadequately managed" charity, a House of Lords debate heard yesterday.

Speaking during a debate in the House of Lords yesterday Baroness Barker (pictured), a Liberal Democrat peer and former charity worker, said: “A cursory examination of the Kids Company annual reports, which are available on the Charity Commission website, shows that the organisation repeatedly ignored warnings that failure to put money into its reserves was putting the charity at risk.

“Does the minister agree that that is a significant failure on the part of the regulator, which had the information and did nothing, and that that should be the subject of a future inquiry, as should the government’s continued funding of an organisation that was clearly inadequately managed?”

Kids Company is already the subject of a Charity Commission statutory inquiry. The Official Receiver has been appointed as the liquidator and its work takes precedence over that of the Commission. Police are also looking into historical claims of sexual abuse between clients of the charity.

Baroness Hayter of Kentish Town, a Labour peer and shadow spokesman for the Cabinet Office, called for the National Audit Office to widen its investigation into Kids Company. It is currently looking into the last grant made to the charity, which was made by ministerial direction against the advice of civil servants.

“We suggest that the National Audit Office should do a wider review," she said. "We should look not just at the official receiver and the Charity Commission but also at the role of government ministers.”

The Labour peer Baroness Armstrong of Hill Top warned that the fallout from Kids Company could discourage people from giving.

“One of the possible consequences of the panic and concerns around Kids Company is that charities which are struggling will actually continue to lose money when really they need to be supported,” she said.

Lord Bridges of Headley, a Conservative peer and the Cabinet Office's spokesman in the Lords, said: “It is ultimately the legal responsibility of a charity’s trustees to protect the charity and its assets. The Charity Commission has neither the legal authority nor the ability to assess the financial health of the more than 160,000 registered charities; that is the job of each charity’s trustees.”

He added that as part of the Commission’s inquiry he expected it to “wish to consider what lessons the sector as a whole and the Commission itself might learn from this episode”.

He said that when the NAO’s report is passed to the Public Accounts Committee it will decide how to proceed.