England & Wales Charity Commission releases result of inquiry into Kids Company

On 20 August 2015, the Charity Commission launched a statutory inquiry into Keeping Kids Company (known as Kids Company, or Kids Co), following the charity having to cease trading earlier that month against a backdrop of a financial examination, issues with funding and donors, and a police inquiry into allegations of sexual and physical abuse.

On 10 February 2022, the Charity Commission finally released the results of this inquiry, having waited until a High Court case brought by the Official Receiver against the charity trustees was concluded (as a result of the case ongoing in 2020 and 2021, the Commission did not issue an interim report of this inquiry in order to avoid prejudicing the court proceedings).

Although the High Court judgement dismissed the Official Receiver’s claim that the trustees were unfit to act as charity trustees or company directors again, and praised the “care and commitment [the trustees] showed in highly challenging circumstances” the Charity Commission found that there was evidence of mismanagement of Kids Company, not least in the case of late and missed payments to HMRC, staff and other creditors due to financial issues. However, the approach the Commission has taken has been criticised, by The Guardian among others, as not doing enough to set the record straight as regards Kids Company, which as a result of a media storm that reported financial mismanagement and allegations of sexual and physical abuse has become “a byword for poor governance and shoddy practice” that is perhaps undeserved.

Facts and Issues

The main charitable objects of Kids Company were “the preservation of health for children in need of counselling, support and therapeutic use of the arts by reason of their social or family circumstances”. Kids Company’s 2013 annual report stated that its vision was to “stabilise, nurture, and ultimately foster the resilience of children and young people, re-integrating them into society” and identifies the children themselves as the organisation’s “primary clients”. Kids Company worked with vulnerable children and families in London, Bristol and Liverpool, offering support with issues including poverty, health, social care and educational issues.

Kids Company received large amounts of government funding: £17million between 2011 and 2013, and overall this figure is reported to be as high as £42million over a 15-year period.

As a result, the charity’s sudden collapse in 2015 was the subject of significant media attention and public scrutiny.

The Charity ceased to operate on 5 August 2015, but still exists legally and the liquidation process is ongoing.

The Charity Commission inquiry details the Commission’s engagement with Kids Company between February and August 2015, during which period the charity met with the Commission on a number of occasions: initially to discuss a donor complaint and how to respond to adverse media coverage, but eventually advising the Commission that the charity was facing a restructure or even closure.

Following allegations of financial mismanagement in July 2015, the Charity Commission supervised an independent examination into the allegations. Although preliminary findings of the examination did not find any direct evidence to support the allegations, the second stage of the review was not undertaken as the charity became insolvent in August 2015. During the same period the Charity Commission were alerted to a police investigation into Kids Company following allegations of sexual and physical abuse.

The cumulative impact of the negative press was that the trustees felt that the charity could no longer maintain public confidence, and that much-needed donations to fund the planned restructure were not forthcoming. The conclusion was that Kids Company would need to close.

Findings

The inquiry covered:

• a review of the governance and financial management of the charity, in particular concerning allegations of inappropriate spending, breaches of financial controls and the actions of the trustees and the CEO at the time when there were concerns about the future viability of the charity;
• regulatory concerns raised by the Official Receiver investigation undertaken as part of the liquidation process; and
• whether or not the trustees had complied with and fulfilled their duties and responsibilities under charity law.

The Charity Commission largely supported the High Court judgement regarding the conduct of the trustees (and the CEO), but importantly the inquiry explains that the issues the Commission considered under its inquiry are broader than those under scrutiny by the High Court. The test for determining that a person is unfit to act as a director is a higher threshold than the Charity Commission would consider as misconduct or mismanagement.

As a result, although the Commission inquiry did not find any evidence of dishonesty, bad faith, or inappropriate personal gain in the way the trustees managed the charity, it did, however, find evidence that the trustees mismanaged the charity.

Areas of concern include:

• Poor or non-existent record keeping (particularly regarding payments), and the destruction by staff (although not the trustees directly) of records was of particular concern, since it resulted in the Commission being unable to determine whether elements of the charity’s spending was justified or was in the best interests of the charity. The Commission’s view was that overall, it demonstrated a standard far below that of what would be expected by the Commission.
• The operating model used by Kids Company, while not in itself unusual or unsustainable, was not suitable for a charity of the size of Kids Company. The risks included a lack of reserves, reliance on grants, donations and short-term loans, over-reliance on a limited pool of donors (including the government) and reliance on one key individual to generate income. The low level of reserves ( in 2013, the reserves were equivalent to just 1.9% of Kids Company’s expenditure for that financial year) had been raised by the company auditors for several years without action being taken. The conclusion of the inquiry was that the trustees had knowingly operated Kids Company based on a high-risk business model and did so for a number of years despite being aware of the risks.
• Regular failures to make payments to HMRC on time (Kids Company owed HMRC approximately £850,000) as well as delayed payments to staff and other creditors, demonstrated financial mismanagement of the charity by the trustees.
• Good governance opportunities were missed; for example, the Chair of trustees had been in place since 2003 and the CEO since 1996. The Commission noted that the rotation of trustees, and appointment of new trustees, is usually in the best interests of a charity as it encourages new ideas and challenges to the status quo. This is particularly important where, as with Kids Company, there is a single person holding a senior leadership role for a long time.
• Diversity issues, including having trustees with a suitable range of skills and experience. The inquiry noted that none of the trustees had experience or qualifications in the field of youth services or psychotherapy, which were two key services offered by Kids Company. The Commission found that although there were plans to add new trustees, and to restructure the charity, these plans were not implemented due to the abrupt closure of the charity. The inquiry found that the trustees should have taken action to improve the charity’s resilience and diversity at an earlier stage.

The Charity Commission inquiry notes that due to the combination of the high profile of both the charity and its CEO, the fact that large amount of government funding was provided to the charity, and that the beneficiaries of Kids Company were extremely vulnerable, “[t]here was a risk of significant damage to the charity sector’s reputation due to the very public failure of a charity of this size”.

The damage to the sector included criticism of the Charity Commission, and the inquiry noted that the very quick and very public collapse of Kids Company resulted in the Commission itself coming under scrutiny. As a response, it launched new guidance – for example, the reserves regulatory toolkit – and an improved complaints process.

Key lessons for charity trustees

• the importance of checks and balances (such as rotating the roles of trustees, including the chair) and setting terms of service for charity trustees is considered best practice, to encourage new ideas and fresh perspectives on how a charity is run;
• the importance of having the right blend of skills and knowledge in charity boards, as well as maintaining board diversity;
• the requirement for operating models to reflect the nature and scale of the charity – although there is not one ‘best way’ to run a charity, the trustees should measure the impact of their choices to determine whether the approach taken is effective;
• the role of financial planning and reserves policies, which must be included in the Annual Report. Again, while the inquiry emphasised that there is not a ‘set’ level of reserves that is right for all charities, the risks of having a low level of reserves must be properly considered;
• considering what needs to happen when charities grow; Kids Company expanded hugely in a relatively short period (expenditure rose from £2.4million to £23million in the period 2004-2013) and in this situation, trustees should consider whether the trustees have the right skills and experience to run a much larger charity. Policies and governance approaches must be scaled up to meet the challenges of a larger charity, and the trustees should consider whether the risks of growth outweigh the benefits.

For the full inquiry report, see here.

The Charity Commission is not the only regulator to report on the collapse of Kids Company: reports have been undertaken by the National Audit Office and the Public Administration and Constitutional Affairs Committee, as well as the High Court case following the Official Receiver’s application in August 2017 to disqualify the trustees and CEO of Kids Company from being able to act as directors or being involved in the management of a company. The High Court judgment given in February 2021 was that the trustees were not unfit to act as directors, and that the Kids Company model was not unsustainable in principle.