Whitehall’s Relationship with Kids Company

Kids Company was by no means the only charity serving this client group, and many other varied charities are delivering vital support for young people without the high profile enjoyed by Kids Company. The failure and public criticisms of Kids Company must not be allowed to taint the whole charitable sector; we have no reason to doubt that the majority of Trustees and charities act responsibly and in accordance with their charitable purposes. Equally, discussions about “gaps” in statutory provision and Kids Company’s vocal criticism of statutory provision throughout the inquiry must not overshadow the exceptional work done by many dedicated individuals working within statutory services.

Kids Company did provide valuable support to many vulnerable young people, albeit the evidence shows that this was on a considerably smaller scale than it claimed in its publications and annual reports. The failures in governance that led to the collapse of the charity should not detract from the commitment and hard work of many highly dedicated individuals working in the organisation. Submissions from former employees document the range of services that was offered by the charity - from material assistance, to educational provision and parental support - and we have reviewed a large number of evaluations that highlight the charity’s vulnerable client base. We note that some of those connected with Kids Company are seeking to continue three of its programmes through a new charity, 1UP, in the hope of continuing some of the projects judged to be amongst Kids Company’s most successful. We hope that the Trustees of 1UP will build upon the best of Kids Company’s programmes and provide effective and sustainable support to those people Kids Company sought to serve.

Kids Company’s most positive legacy is the dialogue to which it contributed about the need to improve support for vulnerable children and young people. The message the charity consistently promoted - that children and young people must be valued, trusted and supported with compassion - must not be lost amid the questions about the collapse of the charity and the criticism about the propriety and efficacy of some of its methods.

Kids Company’s demand-led operating model - based on the doctrine that no child should be turned away - carried the constant risk that the charity would not be able to ensure that its commitments would be matched by its resources. The charity’s Trustees failed to address this risk. Instead, the Chief Executive and Trustees relied upon wishful thinking and false optimism and became inured to the precariousness of the charity’s financial situation.

Kids Company had 19 years of statutory audits, but the charity was wrong to take comfort from this. The charity was signed off as a going concern, but the auditors repeated warnings about the precariousness of its finances and the dependency of the charity upon future Government grants. In any case, statutory accounts are audited and published long after the event and do not show the current state of a charity’s finances.

The Charity Commission’s guidance warns that Trustees must avoid exposing the charity’s assets, beneficiaries or reputation to undue risk and take care not to over- commit the charity. Kids Company relied on a hand-to-mouth existence and by refusing to prioritise the building of any significant reserves, the Trustees failed to exercise this duty of care towards the charity’s clients, employees and donors.

Several Ministers authorised unorthodox payments (in the form of early Government grants and direct grants) despite knowledge of the charity’s significant cash flow difficulties (see Appendix B for full list of payments made to Kids Company over successive Governments). In one case, funding was given despite the unequivocal assessment by HMRC that the charity’s model was not viable. By continuing to fund the charity’s cash flow crises, successive Governments gave tacit approval to an unsustainable and inadequate business model and eroded any incentive for Kids Company to address its own governance and management failings. This continued Government support at moments of crisis nurtured the expectations of Kids Company that it could continue to rely on Government to prop up its finances.

It has proved impossible to reconcile Kids Company’s claims about its caseload with evidence from other sources. The evidence is that the figures were significantly over- inflated. This casts doubt on Kids Company’s claims that overwhelming demand, rather than financial mismanagement, lay at the root of its financial difficulties. In addition, the charity’s practice of calculating ‘reach’, for example in counting a whole class of children as clients if they benefited from work with an individual student, was misleading to donors. Trustees were either ignorant of this exaggeration or simply accepted it, because it helped to promote the charity’s fundraising.

If it is correct that Kids Company was unable to refer its vulnerable clients to the local authority once the charity closed, given the locking up of all relevant files, this may be a serious consequence of Kids Company’s failure to co-operate with Southwark Council when planning for a potential closure earlier in the year (see paragraph 155 for recommendation to the Government). Had the charity co-operated earlier in the process, it is likely that full referrals could have been completed and all vulnerable people provided with support. Kids Company’s lack of co-operation thwarted contingency planning and was highly irresponsible. The list of 15,933 “high clients” provided to Southwark Council and the Committee did not assist the local authority, or the Committee, in assessing true need or caseload.

Ms Batmanghelidjh’s account of Ofsted’s inspection of the Bristol facilities differs considerably from the evidence that Ofsted submitted to the inquiry. The Trustees should have been aware of Ofsted’s concerns about the Bristol facilities and taken action in consequence. Either this information was withheld from the Trustees or they simply failed to act on it in the ten months between Ofsted’s two inspections. This indicates a serious breakdown of proper governance.

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. There is therefore a strong case for statutory regulation of charities who have safeguarding responsibilities for children or vulnerable adults and we recommend that the Government considers how such regulators as Ofsted and the Care Quality Commission can assume these responsibilities as quickly as possible (see paragraph 155).

Kids Company did a lot of valuable work with some very vulnerable clients, and had many extremely dedicated and committed staff. We have had many accounts that employees were inspired and motivated by the quality of support they could deliver to young people, and delivered personalised and effective interventions. Given this, it is both sad and disappointing that robust evaluation of the outcomes of Kids Company’s work is lacking. Without strong evidence of impact and outcomes on a wider scale than small samples or individual case studies, it is difficult to see on what basis Kids Company’s Trustees satisfied themselves of the appropriateness of support given to clients, and the value for money offered by the charity’s high resource model. That the charity invested so little in highlighting and evaluating the outcomes of its work, despite spending considerable funds on research, gives rise to suspicion in many. This approach left the Trustees unable to defend the reputation of Kids Company, which is a prime obligation of the good governance and leadership of any organisation.

Many of Kids Company’s clients experienced extremely difficult, and in some cases traumatic, circumstances, and the unorthodox spending has been put into this context. However, the significant costs incurred to provide luxury items to particular individuals diverted charitable funds from other projects and programmes that had the potential to provide more long-term and effective support to a wider group of young people. Such lavish spending was inappropriate, unwise and irresponsible, and did not represent a proper use of charitable funds. Given the charity’s known cash flow problems, including its difficulties in meeting its payroll and obligations to HMRC, the authorisation of such payments was in defiance of the reality of Kids Company’s financial position and duties to clients. With a complete lack of experience of youth services amongst Trustees, it was impossible for the Board to assess the appropriateness of significant expenditure that Ms Batmanghelidjh justified on The collapse of Kids Company 53 the basis of clinical judgements. It is nevertheless extraordinary that Trustees were content to accept this without more rigorous examination.

Kids Company’s handling of an allegation about a very serious failure of safeguarding was inadequate and irresponsible. It is not appropriate for a known supporter of Kids Company to conduct a supposedly independent investigation, and that confidential information about an employee’s personal circumstances were used to assess her credibility, without transparency about where the information had come from, or permission being given for it to be shared. This represents a serious failure on the part of Trustees to ensure the existence and observance of appropriate processes for handling allegations relating to the safeguarding of vulnerable young people.

There is no evidence that Trustees were involved in the decision to turn down the philanthropist’s offer of significant financial and human resource. At the time the offer was made and rejected, Trustees were attempting to manage a £4 million deficit and secure an additional £12 million grant from the Government. Ms Batmanghelidjh’s citing of mere intuition about an individual’s supposed lack of emotional authenticity as justification for blocking the exploration of a new partnership at a time of extreme financial difficulty underlines how unaccountable and dominant Trustees had allowed her to become, and how far she was able to insist on maintaining personal control.

A charity of Kids Company’s size and complexity requires a Board of Trustees that will demonstrate leadership, judgement and a willingness to challenge assumptions. There was a lack of relevant Trustee expertise in the field of youth services or psychotherapy, although we understand that attempts, albeit belated, were underway to recruit a Trustee with such experience in the run up to the charity’s collapse. The admiration that Kids Company’s Trustees had for Ms Batmanghelidjh’s apparent vision and fundraising capabilities led to a false confidence about other areas of the organisation. The Charity Commission’s guidance to Trustees warns that Trustees should not allow their judgement to be swayed by personal prejudices or dominant personalities, but this is what occurred in Kids Company. This resulted in Trustees suspending their usual critical faculties – particularly over Ms Batmanghelidjh’s insistence on the demand-led business model, her exercise of substantial discretionary spending powers, the effectiveness of internal controls, and the quality of clinical judgements and safeguarding procedures. The length of the Chief Executive and Chair’s tenures were not conducive to challenging the Chief Executive herself. There was a clear link between the failure to correct serious weaknesses in the organisation, and the failure to refresh its leadership.

Mr Yentob denied historic failures in financial management and insisted that there were no questions about the financial resilience of Kids Company until 2014. Given the charity’s historic hand-to-mouth existence, its continual failure to build up reserves, significant periods on the brink of insolvency and its inability to meet 54 The collapse of Kids Company its obligations to HMRC, this is an inaccurate and alarming interpretation. The evidence Mr Yentob gave to the Committee suggests a lack of proper attention to his duties as Chair of Trustees and a continuing inability to recognise those failures. With his fellow Trustees he was unwilling or unable to impose sufficient control. Together, they failed to exercise their proper function as Trustees.

Mr Yentob acknowledges his poor judgement in respect of his position at the BBC during the summer of 2015. His actions were unwise at best, and deliberately intimidating at worst. He has since resigned his main position at the BBC but he still retains substantial responsibilities within the organisation and oversees substantial budgets. It is not within the remit of this Committee to comment on the governance of the BBC, but the proper governance of conflicts of interest and standards of behaviour – particularly amongst its senior executives – is a very serious matter for any reputable organisation. That a senior figure could act in this way and it could take so long for action to be taken reflects poorly on the BBC’s leadership.

Kingston Smith has offered no credible explanation for changing the warnings of insolvency from those issued by the preceding auditors. Mr Brooks stated that Kingston Smith’s softer language still indicated that Kids Company was “living on a knife-edge.” 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, in accordance with its duty as charity auditors under Section 156 of the Charities Act

It is regrettable that, in over three years of auditing the charity, Kingston Smith’s sampling method failed to uncover any of the issues that have since emerged regarding the charity’s expenditure and internal controls. Kingston Smith appeared to be over-confident in the charity’s internal controls. This in turn may have influenced the sampling process and the level of scrutiny to which the charity was subject. For a charity that the auditors acknowledged was “unorthodox”, particular vigilance in identifying the audit risks and sampling size should have been especially important. In addition, the failure of Kids Company’s Trustees to respond to recommendations repeatedly laid out in management letters suggest that Kingston Smith’s confidence in the charity’s management was misplaced.

Kingston Smith did not consider it part of its remit to assure the public of whether Kids Company spent money in line with its charitable objectives. Ultimately, discretion over appropriate spending rests with the charity’s Trustees, not the auditors or the Charity Commission. This inquiry provides a reminder to all who use charity accounts that a set of audited accounts do not provide assurance that charitable funds are being used wisely or that a charity is well run.

Ms Batmanghelidjh’s use of the fact that the charity had 19 years of clear audits, while true, is also disingenuous. Each time the charity’s accounts were signed off as a going concern, the auditors issued significant warnings to the charity about The collapse of Kids Company 55 the precariousness of its demand-led operating model and the dependency of the charity upon future grants and emergency funding. However opaque the language, the meaning should have been clear enough to the Trustees and CEO. Such repeated warnings should have led to a change to the reserves policy, contingency planning for insolvency and substantial downsizing many years before the final crisis.

The Cabinet Office’s tender for the contract to review Kids Company required the successful bidder to provide the Government with assurances about the effectiveness of Kids Company’s governance. PKF Littlejohn now says that the original scope was narrowed, in agreement with Cabinet Office, to establishing whether the policies and procedures in place were appropriate. PKF Littlejohn asserts that Ministers took assurances from the report that were outside the scope of the review. The Cabinet Office should have identified that the PKF Littlejohn remit had altered and communicated this message clearly to future users of the report. This would have minimised the weight Ministers placed upon the very limited assurances the report offered.

However, it is not acceptable that a report commissioned to provide a professional assessment of a charity’s governance and controls looked only at systems and processes; as Mr Duke acknowledged, good controls can be overridden. PKF Littlejohn’s review did not assess the organisation’s sustainability in financial and reputational terms and proved to be of little value in assessing the effectiveness of the organisation’s governance. Without reviewing, for example, decision-making, attitudes and habits of behaviour, risk-management and strategic objectives in the organisation, a contractor could not assess the effectiveness of the charity’s governance and controls and deliver upon the tender’s requirements.

PwC’s preliminary report was of little value to Kids Company, the Charity Commission or the Cabinet Office. Although investigation into one allegation had been completed, the remaining reports were subject to such heavy caveats in consequence of the very short timeframe that no conclusions could be drawn. Nevertheless, the report was cited by supporters of Kids Company as proof there was no substance to the allegations. Kids Company’s rush to complete the investigation resulted in a report that offered no real assurances for the considerable costs incurred.

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. This is a salutary warning about the use of professional advisers. They are no substitute for the exercise of judgement. They tend to limit the scope of the terms of their investigation in order to limit their own exposure to risk. In this case, they were able to avoid making any examination of the wider issues that threatened the charity’s existence. In the partial assurances they 56 The collapse of Kids Company offered, the resulting reports may actually have obscured more than they revealed to those who read them.

It is remarkable that so few people thought it appropriate to complain to the Charity Commission about Kids Company, despite donors and others expressing concerns as far back as 2002, and open adverse comment about Kids Company in the media. This reflects the Charity Commission’s failure to make people aware of this possibility. Complaints would have prompted investigation and could have led to improvements in the charity’s governance and operations.

In the months leading up to Kids Company’s collapse, the Charity Commission worked closely with the charity after receiving complaints from a donor and former employees, but substantive discussions about its precarious financial situation only occurred after the charity’s finances reached crisis point. Earlier intervention from the Charity Commission to advise changes to the operating model might have helped to safeguard the charity, although this has not historically been the role of the Charity Commission. The Charity Commission must make its own judgement about a charity, rather than simply relying on government engagement with an organisation as evidence of a charity’s good governance or effectiveness.

We welcome the provisions in the Charities (Protection and Social Investment) Bill to give the Charity Commission new powers to disqualify a person from being a charity Trustee if: at least one of six conditions applies to the individual; if an individual is unfit to be a Trustee; and if making the order is desirable in the public interest in order to protect public trust and confidence in charities (either generally or in relation to the charities or classes of charity specified or described in the order). Amongst the six conditions that may, in conjunction with the tests mentioned above, disqualify a person from being a Trustee is if a the person was a Trustee, charity Trustee, officer, agent or employee of a charity at a time when there was misconduct or mismanagement in the administration of the charity, and was: responsible for the misconduct or mismanagement; knew of the misconduct or mismanagement and failed to take any reasonable step to oppose it; or the person’s conduct contributed to or facilitated the misconduct or mismanagement. The Charity Commission’s new powers may be applicable to the case of Kids Company.

There are both legal parameters and resourcing issues that currently limit what the Charity Commission can do to improve the effectiveness of a charity’s governance. It is the role of Trustees, not the regulator, to ensure that a charity is well run. However, if the Charity Commission is to maintain public faith in charities and deliver on its statutory duty to prevent, detect and tackle mismanagement in charities, it must have the resources and powers to advise and investigate charities at an earlier stage and to support charities through restructures and downsizing.

While it is not possible for the Charity Commission to interrogate deeply the 60,000 accounts it reportedly receives each year, high risk charities – for example those with a large number of employees or a vulnerable client base – must be under the The collapse of Kids Company 57 greatest scrutiny. We await with interest the outcome of the Charity Commission’s technology transformation plan, which should enable the Commission to identify and scrutinise high-risk charities.

Trustees must have ultimate responsibility for ensuring that a charity has a responsible approach to reserves but the Charity Commission must do more to help to make Trustees aware of their responsibilities in this area. We look forward to the Charity Commission’s reviewed guidance on charity reserves, and expect it will impress upon Trustees of large or complex charities their increased responsibilities in this area.

The Charity Commission should revise its guidance to auditors, to ensure that expectations about auditors’ reporting duties under Section 156 of the Charities Act 2011 are appropriately conveyed. Such guidance must be clearer on the circumstances in which auditors should pass on concerns about an unsustainable operating model, including an inappropriate reserves policy.

The Charity Commission should consider how it can better impress upon Trustees the need to ensure that the Board includes those with appropriate experience of the areas relevant to the charity’s activities. Some Trustees must have this relevant experience, so that they can evaluate the quality of the charity’s activities, and a range of skills must be reflected on the Board. All Trustees must have a responsible attitude towards governance.

The conflicting accounts offered by Kids Company and the Charity Commission about whether guidance was given about returning a large donation, and the propriety of Kids Company’s behaviour in this case is cause for concern. The Charity Commission’s resources and existing statutory framework prevent it from intervening in donor issues that do not involve illegality – but the Charity Commission has not presented any evidence which conveys the disapproval that they have voiced subsequently. We are pleased that the Charity Commission will be reviewing their guidance about managing relationships with donors. This guidance must better communicate the duties of charities towards their donors.

In all communications with charities regarding individual donor complaints, 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.

It is a matter of some concern that a number of witnesses who had grave concerns about the charity did not alert the Charity Commission. As Mr Brooks’s and Ms Berelowitz’s comments indicate, the Charity Commission projects too limited a public profile to provide much reassurance about charities and their regulation, and to attract complaints. If individuals are to understand the role of the Charity Commission, then the Charity Commission needs to be seen to be actively holding charities to account.

The Charity Commission must do more to make the public aware that they can and should take their concerns about a charity to the Charity Commission. The Commission should investigate adverse media reports about a charity and encourage journalists to make formal complaints to the Charity Commission, rather than relying upon the Charity Commission to chance upon their reports. Its guidance should also urge Trustees to make donors, employees and beneficiaries aware that they should complain to the Charity Commission if they have serious concerns about the governance of a charity.

The Treasury and Cabinet Office must address the future funding of the Charity Commission so that it can carry out its functions in the way that Government, charities and the public expects.

In order to underline the constitutional status of the Commission’s Board, the Commission should restore the proper title of its Board members, so they are known as the Charity Commissioners. This would both restore their unique status, and underline that the Chair and his fellow commissioners are jointly and severally liable for the conduct of the Charity Commission in England and Wales, just as a Chair and other Trustees should understand how they are responsible for a charity they govern. (Paragraph 123) Relationship with No. 10

The privileged access to Ministers, numerous ‘special grants’ and exemption from usual reporting processes appear to have distorted the expectations of the charity’s leadership and undermined the warnings issued by Government that funding might not continue. 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.

Ms Batmanghelidjh and Kids Company appeared to captivate some of the most senior political figures in the land, by the force of the Chief Executive’s personality as much as by the spin and profile she generated for the charity. As a consequence, objective judgements about Kids Company were set aside. The Government’s relationship with Kids Company was forged outside the usual decision-making processes of Whitehall departments and there is little doubt that the high profile support of successive Prime Ministers for Kids Company had an impact upon decision-making across Whitehall. This included the authorisation of multiple grants outside of the normal competitive process. We also question whether it was wise to move youth funding from the Department for Education into the Cabinet Office. Had that not occurred, it is possible that less money would have gone to Kids Company and more to other, perhaps better run, youth charities. Other charities have said that they are angry and cynical about how one or two charities gain unfair advantage, and that the approach of successive Governments towards Kids Company has damaged their confidence in Government.

It is also a matter of considerable concern that the knowledge of the high-level political patronage enjoyed by Kids Company may have deterred other individuals from coming forward with concerns about the charity.

We concur with the Public Accounts Committee’s recommendation that, at the very least, if the Government decides to use special powers to grant funding, it should provide a transparent case for its decision and report regularly on the use of these powers. Ministers and Government departments must deploy proven methods of assessment and co-ordinate these effectively, and exercise objective judgement when deciding whether to grant taxpayers’ money to charities.

When allocating funding to charities, Ministers should not risk creating the perception that they are overriding official advice on the basis of personal prejudice or political considerations. In circumstances where they disagree with official advice regarding the release of grants to a particular charity, Ministers, including Prime Ministers, should consider whether such disagreement arises from a conflict of interest. If a conflict could be judged to exist, the Minister or Ministers must recuse themselves from decision-making, including from any influence over any other Ministers making those decisions. Ministers should not allow charity representatives to exploit their access to Government in a way that may be unethical. There must be no suggestion that individual Ministers have funds under their personal control or are exercising personal patronage.

It should be for the relevant departments to control grants to charities, not the Cabinet Office or another department that does not have direct policy responsibility for the sector in question. 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.

Government should re-evaluate the standard process by which grant decisions benefiting charities can be made following input from a number of different departments. This review should consider the creation of an account manager to oversee all funding decisions for each charity. This would enable greater continuity and accountability than seen in the case of Kids Company, which was passed between several departments throughout its existence.

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.

It is astounding that it was only in 2015, by which point Kids Company had received over £35 million from central Government, that the Government acknowledged the need for a robust examination of the charity’s activities and outcomes. Given that doubts were reportedly raised about Kids Company in the DfE, we also question the quality of co-ordination between Government departments, following the transfer of youth policy.

Evidence that former employees have submitted to this inquiry has highlighted the charity’s dependency on selective case studies to evidence its impact. While case- studies may have a role to play in illustrating a charity’s work, wider evidence of impact is required. This is particularly true for charities in receipt of large amounts of Government money. We struggle to see on what basis successive Governments and 60 The collapse of Kids Company other grant-giving bodies, and indeed the charity’s Trustees, satisfied themselves of the appropriateness of support given to clients, and the value of the charity’s high resource model.

It is unacceptable that successive Ministers appear to have released funds on the basis of little more than their relationship with a charismatic leader, small-scale studies and anecdotes, and no more than two visits made by Mr Letwin more than 10 years previously. Releasing Kids Company from the usual competitive grant processes to which other charities are subject, despite a lack of evidence about the efficacy of its model or any evaluation of outcomes, has been proved to be an unjustifiable way to conduct Government business and to handle public money. This approach is condemned by the fact of Kids Company’s failure and is therefore unjustifiable in the future.

Government doubted that the information that Kids Company was circulating regarding its client number was true, but did nothing to correct the record. Instead, it continued to grant funding despite that knowledge.

We agree with the Public Accounts Committee’s (PAC’s) recommendation that the Government should undertake a fundamental review of how it makes direct and non-competitive grants to the voluntary sector. In addition to the areas the PAC recommends for consideration, we see the creation of a measurement framework for the social sector as essential to this. The use of standardised measurement tools will enable more accurate assessments of the value of activity, and enable meaningful comparisons to take place during grant bidding and monitoring. Identifying a charity’s outcomes, rather than simply its outputs, and benchmarking these in relation to other organisations in the sector should be a core part of any funding decision.

We also agree with the recommendations made by the PAC that the Government should improve the way it monitors and evaluates the performance of grant-funded organisations.

If the Government is funding an organisation that provides services such as therapy or education, it must satisfy itself that these services are being delivered by people who are sufficiently qualified to be doing so. For example, a number of local authorities, amongst them Southwark Council, no longer commission Alternative Provision Education from providers that are not registered with Ofsted. Central Government should similarly consider making external inspection from the relevant regulatory body (e.g. CQC or Ofsted) a condition of commissioning, so that it can be sure of the quality of services being delivered.

The Government should insist that charities to which it provides grants provide legally defensible contingency plans. This would help to mitigate the risks of a charity with vulnerable beneficiaries folding unexpectedly.

Information about the charity was reported in a piecemeal fashion across various reviews that actually offered little or no assurance about the effectiveness of Kids The collapse of Kids Company 61 Company’s governance. They were read selectively to gain confirmation of a pre- existing and positive picture of the charity. Government must learn lessons about its use of such reviews, and co-ordinate its activities.

The scope of the PFK Littlejohn review became limited to the point where the final report to the Cabinet Office provided none of the information needed to assess the governance of the charity. It is of particular concern that, when making funding decisions, a Minister took assurances from the report that the report did not offer.

The Government should, as a matter of urgency, examine the process by which it commissions reviews to ensure that it receives the information it requires. It is essential to ensure that the commissioning process does not allow drift from the original scope. Consideration should be given to requiring successful contractors to outline explicitly what level of assurance on specific issues the Government will be able to take from their final report.

The Government was right to attempt to assess the governance of a charity before awarding funds. However, rather than commissioning a review of a charity’s policies and processes from one of the usual outside firms, the Government should develop its own Civil Service capability in order to exercise its own judgement about whether a charity’s governance, quality of decision-making, objective setting and culture are effective, and if its internal controls are sufficient. There should be particular caution towards Boards in which Trustees have held their position for more than two terms, and towards Boards where no individuals have experience in the charity’s particular area of delivery.

This inquiry should provide a reminder to all whose use charity accounts that a clear audit report gives no indication that the charity is well-managed or any assurance that charitable funds are being used wisely and in accordance with the stated purposes of the charity. Charity Trustees also have an obligation to be accountable to their donors.

The Government must not rely upon audited accounts being signed off as a going concern as any assurance that a charity is financially well-managed or well-governed. At the very least, Government must request sight of a charity’s management letters, and should seek direct assurance from the charity’s auditors.

When commissioning external audits or reviews, Government should give priority to contractors with specific experience of the relevant field (e.g. of children’s services) so that meaningful benchmarking can take place.

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. We are not convinced by Mr Letwin’s assertion that the planned changes to the charity’s leadership rendered the allegations under investigation irrelevant. It was an error for the Government to release a second “final” grant to a charity with a history of financial mismanagement, and in which the new Trustees and, as yet unidentified, permanent CEO had not yet proved their competence or commitment to making serious changes to the organisation’s ethos 62 The collapse of Kids Company and practices. We recommend that in future no department should hand over money to an organisation in which serious allegations have not been fully investigated.

The Cabinet Office Ministers’ faith in Kids Company’s commitment to move to a sustainable operating model was misplaced. This was demonstrated by the charity returning to request additional funding six weeks later. The decision to pay the full amount of the April grant in one lump sum, rather than waiting for fulfilment of any of the grant conditions, was not conducive to accountability. The April grant was one more example of the Government providing emergency funding to enable the charity to manage its cash flow, outside of any competitive or evidence-driven process. It failed to deliver any of the desired outcomes.

In neither his letter of direction nor his oral evidence has Mr Letwin provided convincing justification for his and Mr Hancock’s decision to ignore the comprehensive advice of senior officials, whose concerns Mr Letwin acknowledged as accurate and valid. This grant should not have been authorised contrary to advice.

We do not share Mr Letwin’s confidence that the restructuring of Kids Company “might well have turned out, in practice, to have been an abundant success” were it not for the allegations of sexual abuse that emerged later. As the new Finance Director had only been in place for a matter of weeks and the new Chief Executive had not been appointed, there was insufficient evidence that the new leadership could transform the organisation’s business model and activities. Our understanding of Ms Batmanghelidjh’s dominant role in dictating the charity’s direction, despite not holding a Trustee position, and her historic refusal to shrink the organisation make us doubtful about whether the new role of ‘President’ would significantly curtail the influence by which she had hitherto controlled the organisation. Equally, the fact that the Chair of Trustees, who had condoned the excessive spending and unsustainable model over a period of 12 years, was to remain on the Board of Trustees for the foreseeable future makes us question the impact that the changes to the charity’s leadership would actually have had.

The Government Ministers’ willingness to pay £3 million to the charity before receiving the matched funding from philanthropists was unwise and represents a failure in the responsibility Ministers should take for handling taxpayers’ money. Had the Cabinet Office insisted that the money from philanthropists was received before Government made payment, or insisted that both sources of funding were held in an escrow, this would have considerably increased the likelihood of public money being returned. As it was, £1 million had already been spent by the charity, and it is still unknown whether the remaining £2 million of public money can be reclaimed.