Decision

Charity Inquiry: Keeping Kids Company

Published 10 February 2022

This decision was withdrawn on 13 February 2024

This report has been archived in line with policy as it is 2 years old.

Applies to England and Wales

The charity

Keeping Kids Company (‘the Charity’) was entered onto the Register of Charities (‘the Register’) on 25 February 1998. It is governed by a Memorandum and Articles of Association incorporated 30 September 1997 and amended by a special resolution passed 8 February 1998. The Charity’s working name was ‘Kids Company’ and it was also known as ‘Kids Co.’ Its objects 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” and “to undertake any other charitable activity”.

The Charity’s 2013 annual report states that its vision is to “stabilise, nurture, and ultimately foster the resilience of children and young people, re-integrating them into society.” The report also states, “Children are our primary clients, whose needs we always put first” and “Parents and carers are our secondary clients whose needs we address in order to facilitate their support of the child.”

The Charity described its work, in its annual reports, as responding to the needs of children and families by addressing poverty, health, social care and educational issues by working in partnership with 40 schools in London and Bristol, and at its 12 centres in London, Bristol and Liverpool. The Charity described how children and young people self-refer to the Charity and that “local authorities do place children with complex educational needs with us and pay us for this service”. The Charity said it also provided social care or mental health services to children. In the same annual reports, the Charity stated that it supported 36,000 children, young people, and vulnerable adults. It said the Charity “serves a uniquely disadvantaged group of children and young people” and its ethos was that “it will never turn any child in need away”. The Charity’s annual reports illustrate the highly challenging nature of the Charity’s work.

The Charity’s annual audited accounts for the Financial Year End (‘FYE’) 31 December 2013 recorded the following income, expenditure, net assets, and reserves:

• for the FYE 31 December 2013, income of £23.1m, expenditure of £23m, net assets of £1.7m and reserves of £434,282
• for the FYE 31 December 2012, income of £20.3m, expenditure of £18.9m, net assets of £1.5m and reserves of £272,547
• for the FYE 31 December 2011, an income of £15.6m, expenditure of £15.4m, net assets of £0.25m and reserves in deficit by £10,125

Between 2011 and 2013 the Charity was in receipt of some £17m of public money. The majority of this public money – over £14m - was from Central Government. Around £1m or 6% was obtained from local government and around £2m or 11% was obtained from schools. The table below shows a breakdown of the Charity’s income based on the accounts filed with the Commission.

Financial Year Ending	Income from donations from a range of sources	Income from Central Government, Local Government and Schools	Total Income
31 Dec 2013	£14.8m	£6.1m	£23.1m
31 Dec 2012	£12.2m	£5.6m	£20.3m
31 Dec 2011	£9.6m	£5.3m	£15.6m
Total	£36.6m	£17m	£59m

The Charity’s accounts for the FYE 31 December 2013, refer to plans to work with government to identify long-term sustainable funding for the charity.

At its closure in 2015, the Charity had seven trustees. Except for one trustee who was appointed in 2013, all were appointed between 2003 and 2007. The Charity’s Chief Executive Officer (CEO) had been in post since 1996.

The Charity’s last submitted accounts (for the FYE 31 December 2013) report that it had 495 employees and contractors, spending £15.4m on staffing costs. The Charity also relied, as so many charities do, on support from volunteers. The Charity’s 2013 annual accounts refer to there being 11,000 volunteers supporting the Charity between 2011 and 2013.

The Charity ceased to operate on 5 August 2015, but still exists legally. It is insolvent and the Official Receiver (‘OR’) was appointed as liquidator in 2015. The liquidation process is ongoing. On 14 May 2021, following the conclusion of High Court proceedings initiated by the OR (see below for further information) the Commission removed the Charity from the Register on the basis that it does not operate. The Commission will continue to monitor the liquidation process, led by the OR, and provide any assistance as may be required by the OR as part of this process.

Summary of relevant factual background

Events moved quickly in 2015, with the Charity contacting the Commission in February of that year and the Charity ceasing to operate in August 2015. This section summarises the Commission’s engagement with the Charity during that period. The purpose of this engagement was for the Commission to seek assurance that the trustees were taking appropriate action to deal with the major difficulties faced by the Charity in the period prior to its collapse and in response to complaints and allegations made against the Charity, and to identify ways in which the Commission could assist the Charity moving forward.

On 21 February 2015 the Commission was contacted by the CEO to inform it of several issues and request a discussion with the Commission, in summary these were:

• how the trustees had resolved complaints from a donor, who was unhappy with the Charity’s acknowledgment of a donation and report on how their donation had been spent
• how the Charity was responding to recent adverse media coverage
• the recent resignations of three senior staff at the Charity
• the recent positive outcomes of two audits of the Charity commissioned by the Government in respect of its grant funding of the Charity

The CEO noted that all the trustees were aware of and responding to these issues and the Commission acknowledged this in April 2015.

Further adverse media articles regarding the Charity appeared in the national press in March 2015. In response to these and the CEO’s previous correspondence and request for a discussion, the Commission requested a meeting with the Charity. This took place on 31 March 2015 and included the Charity’s CEO and two of its trustees. The issues discussed at this meeting included the unhappy donor, recent staff issues (as reported in the press) and the Charity’s funding status – including various loans as recorded in the Charity’s FYE 31 December 2013 accounts, and its financial viability.

Following the Commission’s request for clarification on funding, the CEO informed the Commission on 6 April 2015 that the Charity had received confirmation of a £1.3m grant from a charitable foundation, which would assist its cash-flow. On 15 April 2015, the Commission notified the CEO that it was satisfied with the clarification received in relation to those issues.

On 27 May 2015, the Charity’s CEO provided a further update, explaining that the Charity had not been able to secure additional funding from the Government and that whilst they had identified a potential stream of funding, the Charity would have to downsize. The CEO told the Commission that the Charity was seeking professional advice throughout this time.

On 23 June 2015 the CEO again contacted the Commission to advise that the Charity was having funding difficulties and that a restructure or potential closure might occur. The Commission was advised by a trustee that the Charity was pursuing funding options, seeking legal and insolvency advice and would update it in due course. On 26 June 2015, the Charity’s CEO contacted the Commission advising that philanthropists had stepped in with additional funding which enabled the Charity to resolve its immediate financial issues.

Media reports in early July 2015 suggested that the Charity’s ability to secure continued funding from Government was dependent upon a number of factors, including the resignation of the Charity’s CEO. The Commission promptly contacted the Charity to establish the facts relating to any continued Government funding of the Charity. The Charity confirmed to the Commission that the CEO had not resigned but steps had been put in place to begin the process for her resignation as CEO, although she would continue to remain involved in the Charity. The Commission was informed by the Chair of the Trustees that the Cabinet Office was aware and supportive of this proposal and was in ongoing discussions with the Charity over continued funding.

The Commission requested an urgent meeting with the Charity which took place on 9 July 2015. The meeting discussed the Charity’s funding, financial stability and proposed governance changes and how the Charity was responding to, and handling, these issues. The trustees confirmed that they were in negotiations with the Cabinet Office about funding. They acknowledged that the Charity could not continue to operate financially in the same way as it had done previously and were in the process of restructuring the Charity, including the trustee board and the CEO’s role, and identifying partner organisations to avoid a loss of services. The trustees said that they would be agreeing to the conditions attached to the Government’s offer of £3m grant funding and that payment of this amount was imminent.

During the 9 July 2015 meeting with the Charity, the Commission emphasised that the ongoing insecure financial position of the Charity – particularly given its public profile – was likely to impact negatively on public trust and confidence in the Charity and the charitable sector more generally. At this time, the Commission did not identify a need to take immediate regulatory action but put the Charity on notice that it might need to do so in the future in order to protect and promote public trust and confidence in charities.

In July 2015 the Commission became aware of financial allegations against the Charity. In response to these allegations, the Commission contacted the Charity on 17 July 2015 to arrange an urgent meeting with its Chair and other Charity representatives. This meeting took place on 21 July 2015. At this meeting the Commission insisted that urgent steps should be taken in response to the allegations that had been levelled against the Charity. Those steps included an immediate independent examination into the specific allegations which would be conducted with the Commission’s regulatory supervision. The trustees confirmed and demonstrated their cooperation with this request and also continued to update the Commission in respect of ongoing changes that had been implemented to improve the Charity’s governance, management and financial controls.

The independent examination required the appointment of an independent external advisor working to the Charity’s (then) new interim Chief Operating Officer to investigate the concerns raised and to the exclusion of the Charity’s CEO, specifically the issues included:

• whether there had been financial irregularities, in particular payments that should not have been made at all, or were in breach of financial procedures and controls
• whether there had been payments which might be in line with the Charity’s purposes, but which might not be prudent given the Charity’s financial position
• how payments were authorised where there was a conflict, because of staff relationships, employment status or other personal relationships
• whether any such irregularities were reported, and who knew about any possible breaches/irregularities; If they were reported to senior management and/or trustees and whether they were properly and responsibly dealt with

The independent external advisor was required to produce a summary written report of findings for the Commission and the Chair of trustees. The report was to include consideration of the extent of any internal or external breaches, financial irregularities and governance issues. The independent external adviser was also required to attend a meeting with the Commission to present the report’s findings.

On 22 July 2015, the Charity appointed an appropriate qualified firm to carry out the independent examination into allegations in relation to the finances of the Charity.

On 27 July 2015, the Commission held an urgent telephone conference meeting with the Charity and firm to discuss preliminary interim findings. The auditors identified a lack of supporting information for some cash payments but had not found direct evidence to support the allegations that had been made against the Charity. The auditors were not able to conclude the second stage of their review because the Charity became insolvent and ceased to operate in early August (see further below).

On 30 July 2015 the Charity received payment of a £3m grant, referred to above, from the Cabinet Office. On 31 July 2015 the Charity contacted the Commission alerting it to an announcement that the Police were conducting a criminal investigation into allegations of sexual and physical abuse at the Charity. This investigation concluded, in January 2016, with no action being taken. In a statement the Police said that they found no evidence of criminality nor had they identified any failings by the Charity in respect of their duty to safeguard children and vulnerable adults. The Charity stated that adverse media reports about these allegations and the Police’s investigation had put in doubt philanthropists’ donations, which the Charity needed to fund its planned restructure, as well as the Charity’s ability to maintain public confidence and donations. The trustees told the Commission that they were concerned that they might need to close the Charity due to the damage that these allegations were causing.

The Charity ceased operations on 5 August 2015.

On 11 August 2015 the trustees formally resolved that an application should be made to the court for the Charity’s winding up on the basis that it was unable to pay its debts. A petition to wind up the Charity was filed by the Charity’s trustees on 12 August 2015. On 20 August 2015 the Charity was put into compulsory liquidation and the OR was appointed liquidator.

On 13 August 2015 the Commission facilitated a multi-agency meeting with several statutory and public agencies – including the Insolvency Service – to ensure effective co-ordination and liaison between the relevant agencies involved.

The closure of the Charity

The Charity stopped operating on 5 August 2015. The Charity’s collapse was a dramatic and significant event not only for the Charity itself – including its beneficiaries, supporters, volunteers and employees - but also for the wider charitable sector. It attracted widespread publicity, as had the Charity’s activities prior to its collapse. The Charity’s CEO and founder has a particularly high public profile, had been the subject or focus of some of the negative media articles about the Charity and was synonymous with the Charity.

The Charity had enjoyed support from philanthropists and celebrities as well as being in receipt of substantial amounts of Government funding. There was considerable media and public interest in what had happened at the Charity in the immediate period prior to its collapse in August 2015. There was a risk of significant damage to the charity sector’s reputation due to the very public failure of a charity of this size. It had worked with extremely vulnerable beneficiaries and had enjoyed support from high profile individuals as well as receiving millions of pounds in grants from central and local government.

Owing to the significant interest in the collapse of the Charity there have been a number of public reports and proceedings relating to it. The National Audit Office (NAO) published a report on 29 October 2015. The Public Administration and Constitutional Affairs Committee (PACAC) published a report on 21 January 2016. The Official Receiver issued an application for a disqualification order against the Charity’s CEO and several of its trustees on 17 August 2017. This led to a High Court Judgement delivered on 12 February 2021. These matters are summarised below and are publicly available.

The National Audit Office Report (NAO)

The NAO published a report into the government’s funding of the Charity on 29 October 2015. The report covered:

• the funding that the Charity received from Government
• the Government’s reasons for funding the Charity
• how the Government monitored the grants made to the Charity

The report did not assess the value for money of the Charity or the effectiveness of the trustees’ oversight.

The NAO found that the Charity received at least £46m of public sector funding between 2000 and August 2015 when it closed. This took the form of:

• grants from the multi-year funding programmes of Central Government departments (£41.4m)
• ad hoc grants from Central Government departments and lottery bodies (£2.6m)
• funding from local bodies, such as local government (£2m) and schools

The NAO report noted that public sector funding accounted for around 30% of the total income reported in the Charity’s accounts between 2002 and 2013. The remainder of its income came from private donations. The NAO’s report refers to the Cabinet Office sending a formal grant offer letter to the Charity in March 2015. The NAO report states that the Cabinet Office recognised the Charity’s financial difficulties in its decision to pay an entire grant of £4.265m for 2015-16 in April 2015 rather than quarterly as in previous years. The NAO found that the grant offer letter of March 2015 contained conditions including that the Charity would move to a more sustainable financial footing during the first six months of the year.

The NAO report refers to the Charity using Central Government funding to cover gaps in its cash flow, for example by asking for early payment of grants in December 2013 and December 2014. All the grant offer letters that the NAO saw from Central Government included a requirement for the Charity to develop an exit plan, setting out how it planned to operate on a sustainable basis in the future without a continued requirement for government funding. The NAO report states. “The government repeatedly required Kids Company to provide exit plans and we have seen evidence that this requirement was met. However, repeated requests from Kids Company for government funding and decisions from the government to award funding suggest the charity never reached a position where it was sustainable and able to operate without government assistance.” (para 4.31 NAO report)

The NAO report also notes that in June 2015 the Charity submitted a restructuring proposal to Cabinet Office ministers. The proposal included several organisational and managerial changes and a request for £3m from the Government which would be matched with £3m from philanthropists. The aim of the proposal was to put the Charity on a sustainable financial footing and reduce further dependency on Government grants. Cabinet Office officials reviewed these plans but concluded that such a grant would not represent value for money for the Government. However, the grant was paid on 30 July 2015 following a ministerial direction. It is noted that, in its 2013 accounts, the Charity had stated that its priorities for 2014 included working with the Government in order to identify sustainable and long-term funding for the future.

The NAO report focused on the role of the Government in funding the Charity rather than on the role of the trustees and the discharge of their legal duties to their Charity which is the Commission’s focus.

The Public Administration and Constitutional Affairs Committee Report (PACAC)

The PACAC published a report on ‘The collapse of Kids Company: lessons for charity trustees, professional firms, the Charity Commission and Whitehall’ on 21 January 2016.

The PACAC report’s Summary states “The Board failed to protect the interests of the charity and its beneficiaries, despite its statutory obligation to do so. Trustees repeatedly ignored auditors’ clear warnings about Kids Company’s precarious finances. This negligent financial management rendered the charity incapable of surviving any variance in its funding stream; when allegations of sexual misconduct emerged in July 2015 and threatened to impede fundraising, the charity was obliged to close immediately.”

The Summary also states that “Primary responsibility for Kid’s Company’s collapse rests with the charity’s Trustees.”

Other findings by the PACAC report included: - the Charity did provide valuable support to many vulnerable young people - the trustees lacked the experience in youth services and psychotherapy necessary to interrogate the decisions of the CEO and assess the appropriateness of expenditure - there was a lack of sufficient evidence about the effectiveness of the Charity’s interventions - the Charity’s demand-led 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 its commitments would be matched by its resources and the trustees failed to address this risk - the Charity relied on a ‘hand-to-mouth’ existence and by refusing to prioritise the building of sufficient reserves the trustees failed to exercise a duty of care towards its employees and donors - there was a “clear link” between a failure to correct serious weaknesses in the organisation and a failure to refresh its leadership

The Official Receiver, its case and the High Court’s Judgement

On 17 August 2017, the OR issued an application for a disqualification order. The OR sought to disqualify the trustees of the Charity from acting as directors or being involved in the management of a company, pursuant to section 6 of the Company Directors Disqualification Act 1986 (‘CDDA’). The OR also sought to establish that the CEO was a ‘de facto’ director and to disqualify her from acting as a director too. The trustees of the Charity were by law also the directors of the charitable company. Disqualification as a company director would automatically disqualify the individuals from holding the office of charity trustee for the same period.

The claim against the defendants made by the OR was that they caused and/or allowed the Charity to operate an unsustainable business model. The allegation was made in two parts. Firstly, it was alleged that the trustees ‘both collectively and individually’ caused or allowed the operation of a business model that was unsustainable without material change from no later than 27 September 2013. Secondly, it was alleged that by no later than 30 November 2014 each of them individually and collectively knew or ought to have known that failure was inevitable without immediate material change. Under CDDA, the Court shall make a disqualification order against a person in any case where it is satisfied that the person is or has been a director of a company which has at any time become insolvent and that their conduct as a director of that company (either taken alone or taken together with his conduct as a director of any other company or companies) makes him unfit to be concerned in the management of a company.

The trustees and the CEO were offered the option of giving a voluntary undertaking not to act as directors or trustees. One of the trustees took that option. The case against the remaining trustees and the CEO was heard at the High Court between 19 October and 17 December 2020.

The Commission’s Inquiry proceeded at the same time as the Insolvency Service’s investigation and the disqualification proceedings. The Commission did not conclude its investigations or publish an interim statement to ensure that the Commission’s actions did not prejudice the court proceedings and so that the Inquiry could consider the outcome of those proceedings.

The role of the Commission regarding issues of insolvency is limited. A number of charities close each year because of financial difficulties. The role of the Commission does not extend to stopping charities from closing, rescuing charities or preventing them from becoming insolvent. Insolvency may, however, become a regulatory concern when the closure of a charity, or the financial difficulties that lead to its closure, may be due to mismanagement and/or misconduct by its trustees or otherwise within its administration.

The Commission’s regulatory role and remit differs from that of the OR. As liquidator, the OR is primarily concerned in insolvency situations with protecting the interests of a company’s creditors including by distributing the remaining assets of the company to them.

The OR is an officer of the Insolvency Service and, when appointed, is an officer of the court, answerable to the court for carrying out the court’s orders and for fulfilling their duties as OR and liquidator. One of the OR’s roles is to investigate the reasons why a company went into insolvency and the conduct of the directors or others concerned in the management of the company. When a company has entered into compulsory winding up ordered by the court, the OR must submit to the Secretary of State for Business, Energy & Industrial Strategy, a report on the conduct of all directors who were in office during the last three years of the company’s trading.

The Insolvency Service must decide, on receipt of the report by the Secretary of State, whether it is in the public interest to investigate further and ultimately whether to seek a disqualification order in respect of the company’s directors. The OR’s findings when finalised are presented as evidence in any proceedings brought by the Secretary of State to apply for a disqualification order.

The provisions of insolvency law apply not only to a person who has formally been appointed a director but also to those who have acted as directors without being formally appointed i.e. a de facto director.

The OR’s allegation against the trustees and CEO was framed as a single allegation of having “caused and/or allowed Kids Company to operate an unsustainable business model”. There was no allegation of dishonesty, bad faith, inappropriate personal gain or expenditure or any other want of probity against any of the trustees or the CEO.

The High Court’s Judgement, given on 12 February 2021 ^{[footnote 1]} was that the allegation was not made out against any of the directors, and they are not unfit. The decision reached regarding the CEO is that she was not a de facto director, so it was not necessary to decide if she was unfit. However, the Judgement confirms that had it been necessary to decide the question a disqualification order would not have been made in relation to the CEO.

The High Court’s findings included:

• whilst aspects of it were high risk, the Charity’s operating model was not unsustainable in principle
• the Charity experienced significant cash flow difficulties. Costs accrued evenly over the year, but donations were seasonal, which increased the risk of cash flow difficulties
• the Charity recognised that it could not continue to increase in scale to meet demand without changing its funding model. From 2013 there were discussions about the Charity’s future funding model, and the shape and size of the Charity
• funding came under further strain during 2014. The trustees reasonably believed that additional funding could be obtained, and it was reasonable to clarify the Government’s funding priorities before determining if cuts were required. A contingency response was developed and discussions with the Government were pursued
• the Charity had a full-time permanent executive, in addition to the CEO, whose expertise the trustees were legitimately entitled to rely upon, and they did so
• the Charity had formulated a restructuring plan. If it had not been for the unfounded sexual assault allegations it is more likely than not that the restructuring would have succeeded, and the Charity would have survived

The Judge considered that had it not been for the unfounded allegations the Charity’s plans for restructuring would have been successful. The allegations came in the aftermath of the Jimmy Savile abuse scandal and the Police were obliged to investigate them in detail. The Police investigation was discontinued in January 2016 when they reported that they had not identified any failings by the Charity in its safeguarding duties. The Judge further commented that if the Charity had built up sufficient reserves to cover 3 months of its operating costs then the Charity would still have been well short of what was required to sustain it to the point where the Police investigation concluded.

The Judgement also included findings that:

• the CEO did have a central role, including in developing strategy, but she was subject to supervision and control by the trustees, who were the ultimate decision makers
• the trustees exercised real scrutiny over expenditure and were entitled to gain comfort from external reports and to expect staff to draw any major concerns to their attention
• the trustees’ conduct did not amount to incompetence of a high degree

The Judge concluded that ‘most charities would, I would think, be delighted to have available to them individuals with the abilities and experience that the Trustees in this case possess’ and that it is vital that able and experienced individuals are not dissuaded from becoming or remaining trustees. A disqualification order was not warranted against any of the trustees and the public needed no protection from them. The Judge stated that she had a great deal of respect for the care and commitment the trustees had shown in highly challenging circumstances.

Issues under Investigation

On 20 August 2015 the Commission opened a statutory inquiry (the Inquiry) into the Charity under section 46 of the Charities Act 2011 (the Act).

The Inquiry closed on 10 February 2022 with the publication of this report.

The scope of the Inquiry, as set out at the time of its opening, was to examine:

• the administration, governance and financial management of the Charity including concerns around allegations of inappropriate spending, breaches of financial controls and the conduct of the trustees and the CEO amid concerns about the future viability of the Charity
• any regulatory concerns arising from the investigation carried out by the OR as part of the liquidation process
• whether or not the trustees had complied with and fulfilled their duties and responsibilities as trustees under charity law

Owing to the OR’s investigation, aspects of the Inquiry were placed on hold pending the outcome of the High Court proceedings. Our findings below reflect the Commission’s regulatory perspective and the statutory framework in which the Commission operates. The Commission notes the findings by the High Court and the reports by others into the Charity but also notes that the scope of the litigation before Mrs Justice Falk and the other reports referred to above is not the same as the regulatory concerns or scope of the Commission’s inquiry.

The OR sought to disqualify the Charity’s directors and the CEO – whom it argued was a de-facto director – together ‘the defendants’, under section 6 of the CDDA. The High Court, considering the civil burden of proof, found that the defendants were not unfit for the purposes of CDDA proceedings. The Commission respects and acknowledges the High Court’s findings. However, its statutory duties and functions are broader than the issue that the High Court was asked to determine. The Commission’s duties and functions include the identification and investigation of misconduct and/or mismanagement in the administration of charities and to take remedial or protective action in respect of such misconduct and/or mismanagement. Whilst misconduct and mismanagement are not defined in statute, the Commission has set out some of the actions and conduct which, in its view, would constitute misconduct and/or mismanagement. ^{[footnote 2]} Determining that an individual is unfit is a relatively high test to meet; there is a range of conduct which would not or would not be likely to meet the test for unfitness but which would or could still constitute misconduct and/or mismanagement in a charity’s administration.

A number of other regulators and statutory agencies have been involved in dealing with issues about the Charity, alongside the Commission. These include the Police, safeguarding agencies, local authorities, the Government as grant provider, and the OR. The Commission has also engaged with the following agencies and regulators to gather evidence or exchange information: the Police, Her Majesty’s Revenue and Customs (HMRC), Department for Work and Pensions (DWP), the Cabinet Office, the NAO, and local authorities. The number of different public agencies with an interest in matters connected to the Charity is indicative of the strong public interest in, and the complexity of, the various allegations made against the Charity and the concerns that materialised in relation to the Charity.

The Commission is not responsible for investigating or dealing with safeguarding instances and does not administer the legislation on safeguarding children and vulnerable adults. The police, local authorities and the Disclosure and Barring Service have particular statutory roles in this regard. The Commission has an important but limited and specific regulatory role, which focuses on the conduct of trustees and the steps they take to protect their charity, its assets and its beneficiaries as well as safeguarding public confidence in the charitable sector. Specific allegations were made in 2015 relating to historical sexual and physical abuse in this Charity. The Police investigated these allegations, by way of a separate investigation in 2015. This investigation concluded in early 2016 (please refer to the above paragraph) with no further action being taken having found no evidence of criminality.

Once the Judgement in the company director disqualification proceedings had been issued the Commission was able to consider how to proceed with its inquiry. The Inquiry carefully considered the High Court’s Judgement as well as the work completed by the Inquiry to date. Based on these considerations the Inquiry decided that the legal test had not been met for it to commence its own disqualification proceedings against the trustees and/or the CEO.

Findings

The Inquiry notes that the Charity was involved in highly challenging work amongst the most vulnerable children and young people in the UK and acknowledges the co-operation of the trustees and the CEO throughout its inquiry.

Charity records

The Inquiry has based its findings on the records that it was able to examine. Whilst the Inquiry was able to review substantial documentation, there were insufficient records for it to make findings in some areas. This is for two reasons. Firstly, some of the Charity’s records were destroyed at the time of its collapse. Secondly, it appears that some records may not have actually been created. The Inquiry accepts that when the trustees were first notified of the destruction of the Charity’s records, they gave immediate instructions for it to stop. In her Judgement, Falk J found that the destruction of the documents was contrary to the trustees’ instructions. The Inquiry notes, however, that the trustees were ultimately responsible for ensuring that the Charity made and retained proper records.

If records had not been destroyed, this could have helped to ensure that sufficient information was available to protect the interests of beneficiaries going forward – particularly if support to them was continued by another charity or service provider. The Inquiry’s view is that the destruction of the Charity’s records, at the time of its collapse, was not in the best interests of either the Charity or its beneficiaries. It also meant that full records were not available for scrutiny by the Inquiry or other interested parties. It is the Inquiry’s view that the destruction of some of the Charity’s records in the run up to it ceasing to operate should not have taken place.

The Inquiry was told that records existed of decision making in relation to payments to clients, but it was unable to find such records amongst those that it was able to review. The Inquiry could find only limited and, in its view, insufficient records of decision making in relation to expenditure on some beneficiaries for school fees, rent and accommodation, cash payments, clothing and birthday presents. Whilst these payments would have been within the objects of the Charity the Inquiry saw insufficient evidence of how the Charity assessed the needs of individuals in relation to some of these payments.

The Charity’s Beneficiaries

In an interview with the Commission on 14 January 2016, the Charity’s CEO informed the Inquiry that the Charity assisted around 36,000 beneficiaries a year. This figure is also mentioned in the Charity’s Annual Report. She explained that this figure was made up of approximately 19,000 school pupils, 9,700 children at street-level centres and 7,200 adults. Leaders from all the Charity’s sites would gather and check data on the numbers they worked with. The figures would then be collated by the Charity’s audit department. The Commission’s understanding is that the figure of 36,000 included indirect as well as direct beneficiaries, meaning that if one child in a family was assisted the other children in that family were counted as beneficiaries, and if one child in a school class was a direct beneficiary the other children in the class were counted as indirect beneficiaries. The Inquiry considers that in the interests of transparency and to avoid misconceptions, the methodology for calculating these figures should have been clearly articulated wherever they were cited, particularly in the Charity’s annual reports.

The beneficiaries who received the largest amounts of financial assistance from the Charity were referred to within the Charity as the ‘top 25’. The Inquiry was only able to obtain partial records in relation to some payments to these clients. For example, the Charity’s records seen by the Inquiry showed that between January and July 2014 the top 25 beneficiaries had spent on them a total of £311,049.99; this is an average of £1,777.43 per beneficiary per month. From the limited information that the Inquiry was able to review the Commission saw insufficient evidence of the decision making in relation to some of these payments to be satisfied that they were justified or made in the best interests of the Charity. The Charity’s trustees ultimately had discretion on how to spend its resources in furtherance of its objects. However, it is possible that the Charity might have been able to have provided more assistance to more clients if expenditure on the ‘top 25’ beneficiaries had been reduced.

The Inquiry examined the Charity’s policies relating to payments to its beneficiaries. These stated that three or more professionals should be involved in making decisions regarding financial support and that financial support should be regularly reviewed in case management meetings. The inquiry acknowledges witness testimony as recorded in the High Court Judgement that senior management team members provided trustees with appropriate assurances that the policies were followed. Due to a lack of records, the Inquiry was not able to examine sufficient records to test and come to its own conclusions as to whether the policies were adhered to in practice.

Operating Model

The Charity operated under a demand-led model, continuing to experience increased demand for its services and year-on-year growth. The trustees decided to put the funds it obtained into expansion rather than building reserves and/or paying some of its creditors. The Charity’s financial viability depended on a combination of securing government grants, large donations from wealthy philanthropists, and donations from the public. The trustees allowed expenditure to increase without a secure stream of income or adequate reserves to cover the increased costs. The Charity increasingly relied on short-term loans to address shortfalls in income and negative cash flow balances which the Charity was on some occasions unable to repay and which in some cases were converted into donations.

The Inquiry notes that whilst there are risks associated with this operating model, such a model is not in and of itself unusual; in the Commission’s experience as regulator of the charitable sector what is unusual is the operation of such a model in respect of a charity of this size. The combination of a lack of reserves, reliance on grants, donations and short-term loans, reliance on a key individual for fundraising and operating a demand-led model is high risk. The Inquiry acknowledges that the Charity had operated this model for many years whilst providing charitable services to its beneficiaries, and that they were in the process of restructuring before the Charity’s closure. It also notes the argument that donors may expect donations to be spent on delivering activities for beneficiaries rather than building reserves and that it might have been difficult to fundraise for the purpose of building reserves. However, it is unclear to the Inquiry the extent to which donors would have ceased to make donations to the Charity if a proportion of the funds donated had been put into reserves. Whilst recognising the challenges charities can face when building reserves, many charities do successfully manage to build reserves whilst being largely reliant on grants and donations.

The Inquiry notes that the auditor’s management letters to the Charity for the financial years ending 31 December 2011, 31 December 2012 and 31 December 2013 (which accompanied the Charity’s unqualified accounts) clearly stated the risks associated with the low level of reserves held by the Charity. Despite the risks being restated for each of the financial years, the trustees maintained the Charity’s low level of reserves.

Trustees have a duty to manage their charity and its resources effectively and prudently. The 2013 accounts showed the Charity had reserves of just over £434,000, equivalent to around 1.9% of the Charity’s expenditure for that financial year. The level of the Charity’s reserves had been repeatedly raised in management letters by the Charity’s auditors. The Charity prioritised the immediate and urgent needs of its beneficiaries at the expense of its longer-term sustainability.

It is accepted that the criminal investigation had a significant impact on the Charity and is likely to have impacted donor confidence. If the Charity had had a higher level of reserves, it may have been able to utilise these to weather this storm and thereby avoid insolvency and/or wind up in a more orderly fashion or merge with another organisation and therefore ensure ongoing care and support for its beneficiaries. The trustees’ decision to operate with a low level of reserves meant they could not do so.

The trustees had recognised the need to make changes as early as 2013. As referred to above, prior to its closure the trustees had put in place plans to restructure the Charity. If it were not for the criminal investigations, had the restructuring gone ahead, it is likely that the Charity could have continued to operate despite the low level of reserves.

The High Court’s Judgement found that the trustees’ decision to put money into the Charity’s expansion rather than to build up reserves fell within the wide range of reasonable decisions the trustees could make in exercising their discretion. However, in the Inquiry’s view it would have been prudent for the Charity to seek to build up reserves to provide it with a financial cushion in the event of unexpected expenses or an unexpected fall in income.

Financial Management

The Charity regularly failed to make some PAYE payments to HMRC on time. Records seen by the Inquiry from July 2014 onwards show a pattern of failure to pay monies owing to HMRC on time, warning letters being received from HMRC, negotiations with HMRC, part payments of debts being made and debts then continuing to rise again. By June 2015 the Charity owed an estimated £1,162,920 to HMRC and at the time of its liquidation the Charity owed around £850,000 to HMRC.

The Judgement makes reference to payroll being one day late in November 2014 due to funds not having cleared. It also refers to the anxiety of self-employed workers who were collectively owed £100,000 in outstanding payments for July 2014; these payments were still outstanding and being discussed by the Charity’s Finance Committee in November 2014. The Inquiry also saw evidence that payments to some workers ^{[footnote 3]} were not made on time. Reasons given to one of those affected included the Charity’s variable income stream, waiting for Government grants to honour invoices and waiting for funding agreements exchanges between Government, philanthropists and trustees to be finalised.

These failures to make payments to HMRC, workers, and other creditors on time is, in the Inquiry’s view, evidence of mismanagement in the administration of the Charity. This mismanagement would have undermined confidence in the Charity and its management by its trustees.

The trustees and the CEO

The Inquiry notes that the trustees were skilled and experienced individuals in their lives outside of the Charity and that they were able to bring these skills to their operation of the Charity. The Charity had a full-time executive team whose advice the trustees legitimately relied upon and whom they held to account. However, the trustees did recognise the need to strengthen and diversify the Board. There was evidence that a review took place and that candidates were identified but this process had not been completed before the Charity’s closure.

Whilst some of the trustees had previous experience of being trustees of other charities, in the Inquiry’s view, given the size of the Charity, the trustee board may have benefitted from having someone on the board with operational experience of running a large charity, for example a CEO of a large well-run charity. The trustees might also have sought to benchmark the Charity’s performance against that of other charities operating in similar circumstances. There are many large charities that rely on donations and grants and operate a demand-led service and have been able to build reserves and meet their financial liabilities on time to make them more resilient. An appreciation of how other charities manage in a difficult financial environment was likely to have made a useful contribution to the collective skills of the Board.

The Inquiry notes that the Chair of the Charity’s trustees had been in post since 2003 and the CEO since 1996. Rotation of the trustee board including the chair is usually in the interests of a charity as it allows for an injection of new ideas and approaches and for challenges to the way in which a charity operates. Trustees should think about how long they have been in post, the requirements of their Governing Document and their current mode of activities and whether the current composition of the Board is operating in their charity’s best interests. The Inquiry notes that it was told by the trustees that some of them had wanted to step down but agreed to stay on and that the planned restructure would have included the appointment of new trustees.

The Inquiry also noted that none of the trustees appeared to have any qualifications or experience in the field of youth services or psychotherapy. An introduction of new trustees, including trustees with relevant experience in the field in which the Charity was operating, might have increased the performance and effectiveness of the Charity. It would also have allowed for practices and processes to be reviewed in a way that did not happen in the Charity. As mentioned above, the trustees were planning to restructure the board prior to the Charity’s closure. The trustees informed the Inquiry that as part of this restructuring they were looking to appoint individuals with financial and clinical experience.

If some of the trustees had more experience in the areas in which the Charity was operating, they might have been better able to perform their role as ultimate decision makers by questioning the decision making of others – e.g. the trustees might have exercised greater oversight of the clinical team’s decision making if they had had the knowledge and experience to assess its decision making more effectively.

The CEO was the public face of the Charity and had significant influence over it. The Inquiry notes the findings of the Judgement of 12 February 2021 that the trustees were the ultimate decision makers and that whilst the CEO had significant influence, she was accountable to the trustees. Nevertheless, a single person holding a senior leadership role in a charity for many years can reduce the level of challenge to long established methods of operating and prevent it from identifying and managing risks that flow from longstanding practice. For example, the charity’s auditors raised concerns with the charity’s low level of reserves and the high number of self-employed staff for two consecutive years (2012 and 2013) prior to the charity’s closure. Whilst the Inquiry accepts that the trustees did hold the Charity’s executive to account, it is its view that the regular addition of new trustees is likely to have challenged the status quo more effectively.

Conclusions

The Commission has had regard to the High Court Judgement and agrees with it that there was no dishonesty, bad faith, or inappropriate personal gain in the operation of the Charity.

In the Commission’s opinion, the Charity operated under a high-risk business model as illustrated by the combination of (i) heavy reliance on grants and donations, (ii) reliance on a key fundraiser (the CEO), (iii) a lack of reserves and (iv) a demand led service. The trustees were aware of these risks and continued to operate the Charity under the same model for many years, only developing a restructuring plan in the last months of the charity’s operation. The restructuring plan included reducing the Charity’s operating costs, building reserves and appointing a new CEO. The Inquiry notes that in the context of the OR’s claim the Judge viewed these decisions to be in the wide range of reasonable decisions available to the trustees.

Some of the Charity’s records were destroyed when the Charity closed. The Inquiry has seen no records of what was destroyed. Given that the destruction of its records was significant and irreversible, the Commission would have expected there to be better record keeping in relation to destruction of records. It was also not clear on occasion whether records were destroyed or never existed in the first place. Trustees ensure accountability through the records the charity keeps and as a result of the destruction of some records they were not able to fully account for some of their decisions and activities. The Inquiry accepts that the trustees were not directly involved in the destruction of records and when they were made aware of it they acted to stop it; nevertheless, the destruction of the records fell below the standards the Commission would expect from a charity.

If the Charity had had a higher level of reserves then it would have been able to utilise these when the Charity faced financial difficulties. Higher levels of reserves may have allowed the Charity to avoid liquidation and to have wound up in a more orderly fashion or merged with another charity, even if it was determined that it could not continue to operate. This would have allowed all relevant records to be maintained and ultimately handed over to another service provider which would have been in the interests of the Charity’s beneficiaries. A risk of maintaining insufficient reserves is that a charity is more vulnerable to external and variable pressures, such as – in this instance - the public allegations against the Charity and the Police investigation that followed which resulted in the withdrawal of support from donors.

The Charity’s repeated pattern of failing to make payments to HMRC when these were due and failure to make payments to workers on time illustrates the financial difficulties that the Charity was in and the failure to manage these effectively. This repeated failure was mismanagement in the administration of the Charity by its trustees.

It is clear that beneficiaries did benefit from the Charity’s operations and that the Charity’s CEO was an effective fundraiser. The trustees were skilled professionals, aiming to further the objects of the Charity by the contributions that they made to it. They had experience in business and, for some, experience as charity trustees. The Judgement referred to the variety of abilities and skills held by the trustees. However, there were some skill gaps within the trustee body, including a knowledge of psychotherapy, youth services and experience of running a large and complex charity. Further, greater rotation of the key roles – including the chair of the trustees – would have meant that longstanding practices in the management or operation of the Charity were more likely to be challenged constructively and regard had to good practice from outside the Charity.

The Charity’s high-risk operating model combined with its year-on-year growth placed an obligation on the trustees to assess the risks and take steps to manage them accordingly. The Commission notes the significant amount of public funding received by the Charity and the existence of cash flow problems within the Charity as well as its apparent inability to operate without government funding. These conditions were not unique to the Charity but did increase the risk to its long-term viability. Further steps could have been taken earlier during the Charity’s period of growth to improve its financial stability, for example by building up reserves, paying off its debts thereby strengthening its cash flow position, and controlling the rate at which the Charity was expanding. The Inquiry noted that restructuring plans were in place which could not be fully implemented due to the Charity’s abrupt closure. The Commission concludes that the Charity’s trustees should have taken action earlier during its period of growth.

Regulatory Action Taken

The Commission took the following action pursuant to the Inquiry:

• formal, verbatim, recorded interviews have been conducted with all of the individuals who were trustees at the date of closure of the Charity, as well as a former trustee, who had resigned, and the CEO. These interviews were conducted under oath in accordance with powers conferred by section 47(3) of the Act. In total, 22 interviews have taken place, including with various former employees. Over 47 hours of witness evidence was obtained
• the Commission sought information from the Charity’s auditors and met and interviewed various donors and benefactors, including the donor who had made complaints to the Charity and two of the Charity’s most significant individual donors. One beneficiary also provided evidence to the Inquiry of their interaction with the Charity
• the Inquiry made various efforts to contact several former employees it wished to speak with, but some of them could not be found
• the former employees who the Commission could contact have also, to date, cooperated - with two exceptions. One declined to be interviewed on health grounds, instead providing a written statement and another stated they were unwilling to do so because of their relationship with a former beneficiary closely associated with the CEO
• the Inquiry examined over 167 boxes of documents, 96 filing cabinets and had access to approximately 500,000 electronic documents. This enabled the Inquiry to identify evidence to support concerns it had put to those being interviewed and to verify witness accounts. The documents inspected and scrutinised included minutes of trustee meetings, minutes of finance and governance sub-committee meetings, policy documents, and staff and volunteer records. 154 of the boxes examined contained some paper based financial management and accounting records, all of which were reviewed by the Inquiry. All of the cabinets, and 48 of the 167 boxes inspected contained beneficiary related files, including numerous loose-leaf documents, which were not placed on individual beneficiary files before the Charity closed. The Inquiry accessed 11,286 electronic records relating to beneficiaries. Given the sheer volume of the task, the Inquiry focussed on those records relating to 205 beneficiaries that were referenced specifically in various financial records inspected by the Inquiry
• additional material was provided by the trustees through their legal representative in the form of (i) written statements and (ii) written records of telephone conversations which took place at the Charity, which could not be located in the records
• legal powers under the following provisions of the Act have been exercised during the Inquiry:
  • section 47(3) of the Act, ten times, to direct the provision of information by way of interviews under oath
  • section 52 of the Act, to make an order to compel the production of material held in confidence from the Charity’s auditors, the Charity’s banking providers and the BBC
  • sections 54-56 of the Act, to exchange information with public authorities under the statutory gateways in the Act
  • section 47 of the Act, to issue a direction to obtain information from an external service provider

Where appropriate, the Inquiry has liaised with, and provided information to, the OR and the Insolvency Service. This has been necessary because of the overlap and relevance of some of the issues in the OR’s investigation and the issues being investigated by the Inquiry relating to the financial management and governance of the Charity.

The Commission has, throughout the Inquiry, worked on a multi-agency basis with the other public authorities with an interest in the Charity, including the Police, HMRC, DWP, DBS and the Information Commissioner’s Office.

On 14 May 2021 the Commission removed the Charity from the Register in accordance with section 34(1)(b) of the Act on the basis that it does not operate.

Issues for the wider sector

Kids Company’s closure was a sudden, dramatic and significant event. The impact was felt not just by the Charity and the young people it helped, but also by the wider sector and government. It attracted scrutiny and speculation; left beneficiaries unsupported; and undoubtedly undermined public trust in charities. While the particular circumstances were unique and therefore unlikely to be replicated, there are lessons about running, funding, and closing a charity for charities and trustees to take on board.

Much important work has been done to identify the causes of events in 2015. Reports have been issued by the PACAC and the NAO, and the High Court has issued Judgement (in February 2021) in the company director disqualification case brought by the OR.

The following lessons take in the findings made by others, but are centred upon our own unique regulatory perspective, informed by our investigation and indeed the longer view. We hope these reflections help charities and others to apply these lessons to today’s context.

The purpose of these wider lessons is to highlight broader issues that may have resonance for the sector and/or the Commission. The lessons fall into four broad areas:

• the importance of checks and balances, and the right blend of skills and knowledge, in charity boards
• the requirement for operating models to reflect the nature and scale of the charity
• the role of financial planning and reserves policies
• considerations when charities grow

Charity boards should ensure checks and balances - and the right blend of skills and knowledge - are in place, to avoid power imbalances

The High Court Judgement of 12 February 2021 states that although the CEO of Kids Company had significant influence, she was accountable to the trustees. Our inquiry report notes that ‘a single person holding a senior leadership role in a charity for many years can reduce the level of challenge to long established methods of operating and prevent it from identifying and managing risks that flow from longstanding practice’. This raises questions around how a charity is structured and whether there are mechanisms in place to ensure longstanding CEOs and executives are nevertheless challenged by trustees and that trustees have the requisite skills to do so.

Founders of charities also need to be mindful that a permanent leadership role is rarely in the best interests of a charity. There are other ways of harnessing the passion and talent of founders or charismatic individuals, without their having executive or strategic power and responsibility.

Asymmetric power or influence can lead to unhealthy board or wider organisation dynamics, and ultimately to poor decision making. No charity should be defined by a single individual.

Crucially, all trustees have shared responsibility for their charity, and that responsibility is ultimately theirs, not the CEO’s.

Term

Charities (of all sizes) could consider setting an agreed term of office for trustees, to bring in fresh perspectives and to avoid complacency. Best practice – set out in the Charity Governance Code – is that longer appointments should be subject to review, taking into account the need to progressively refresh the board, and should also be explained in the trustees’ annual report. Longer appointments should be exceptional, and the Commission would expect clear evidence that a charity had considered the risks and benefits.

Trustees – including the chair – may want to consider rotating their roles, allowing for an injection of new ideas, and challenges to the way in which a charity operates.

Diversity

Our inquiry report notes that a greater breadth of experience in the trustees at the Charity might have meant they were better placed to question the executive’s decisions; likewise if the trustees had a broader range of skills, including knowledge about the therapeutic process. Whilst the trustees of Kids Company did recognise the need to strengthen and diversify the Board, the implementation had not been completed before the Charity’s closure. Separately, it is worth stating that diversity – in all its forms – across trustee boards leads to better decision making which can help to mitigate these risks. It is recognised across the sector that diverse boards are more likely to recognise and counter any imbalances in power, perspectives and opportunities in the charity. Such diversity is only effective and sustainable if the board works to be inclusive, ensuring that all trustees are welcomed, valued and able to contribute.

Charities should identify and balance the risks associated with innovative operating models, and evidence the benefits

There is no ‘best’ way for charities to deliver public benefit. Rather, diverse and innovative operating models can help keep the sector relevant and dynamic. Problems can arise, though, when a charity’s innovative approach is not balanced by management of the commensurate risks.

For all charities, measuring impact should be part of the process of evaluation of whether their approach is effective – particularly where an innovative approach is being adopted.

Charities should undertake financial planning and recording including maintaining a reserves policy

There is no single level of reserves that is right for every charity.

However, a low level may mean limited resilience against challenges including short–term financial difficulties, cash–flow problems, or increasing demand. COVID-19 is an example of how reserves can be vital to withstand short–term and unforeseen pressures. Research for the Commission found that 40% of charities have drawn on reserves as they responded to the challenges presented by the pandemic.

Kids Company operated on a low level of reserves for many years, prioritising the immediate needs of its beneficiaries and expansion over building up reserves. If the Charity had held greater levels of reserves, it may have been able to wind-up in a more orderly fashion or merge with another charity, which would have gone some way to mitigate the impact of its closure on beneficiaries. We advise all trustees to make well-rounded and appropriate decisions about their approach to reserves.

Contributing to core costs

When awarding contracts or grants, we encourage all funders including government to consider extending payments beyond the marginal cost of the service concerned, to also contribute to core costs of the charity, such as the building of reserves or covering important overheads like safeguarding. This helps to build the resilience of the charity, supporting in turn the reputation of the sector as a whole.

Transparent decision making and policies

Charity law ^{[footnote 4]} requires all charities to describe their approach to reserves in their Annual Report – for which all trustees are equally responsible. If a deliberate decision has been made to operate with little or no reserves, this should be clearly explained in the Annual Report. And once set, a reserves policy should be reviewed on a regular basis, so that trustees can comply with their legal duties, including acting in the best interests of their charity.

The Commission encourages trustees to routinely document board decisions, including those relating to financial planning. If published, evidence of financial planning can serve as an insightful resource for potential donors and funders. Documentation of decisions can also help to protect trustees if something goes wrong by showing they have acted appropriately.

Charities should ensure infrastructure, governance and resources keep pace with growth

Many charities expand over time, as the outcome of perseverance, hard work, and meeting needs. Risks arise when expansion is not underpinned by processes and structures that support and sustain growth.

Kids Company grew quickly – almost tenfold in less than a decade, from an annual expenditure of £2.4m in 2004, to £23m in 2013.

Some concerns were raised about the trustees’ collective capacity, skills and experience to manage the effects or the impacts of the charity’s growth. Whilst some had previous experience at other charities and in business, in the Inquiry’s view the charity would have benefitted from recruiting someone with experience of running a large and complex charity to the board. Our report notes that diversifying the Charity’s board was planned, but not implemented before its closure. The trustees might also have sought to benchmark aspects of the Charity’s performance against that of other large charities operating in similar circumstances.

Preparation

Before expanding, charity trustees should ensure their infrastructure, trustee experience, and staff are well matched to their new size/model. They should have sustainable income to support their growth and understand how these sources could be put at risk. In addition, they should ensure that policies are scaled up to reflect the needs of any expanded or newly introduced beneficiary groups. They must ensure that their governance is robust, ideally with at least one trustee with experience of managing a charity of similar scale on the board. Ultimately, they should make sure that this growth is the best way to further their charitable objects and that the risks of growth do not outweigh the benefits. These considerations should be monitored regularly throughout the expansion process.

Management of a charity’s income, planning and monitoring

The Charity received substantial amounts of government funding, and at times relied on it to help manage cash flow. The NAO’s analysis of briefings to Ministers in 2002, 2005, 2007, 2010 and 2015 revealed that “officials accepted Kids Company’s assertions that it would become insolvent without Government grant funding”.

Charity trustees should regularly review and assess the risks faced by their charity in all areas of its work and plan for the management of those risks. Reliance on a single funder or small group of funders to manage short-term cash flow issues creates a financial risk for charities. Charity trustees need to agree or set, and then monitor, their charity’s overall approach to fundraising. Trustees should be fully aware of their charity’s overall financial position and be able to demonstrate how fundraising supports its long-term strategy for the achievement of its objectives. Trustees should have effective systems in place that enable them to analyse the charity’s sources of income and identify risks from over dependence on any source of funding. Trustees should also ensure that there is a realistic budget for fundraising, against which results are monitored and fundraising performance, including costs and any risks are managed.

Funding decision–making

PACAC recommended seeking assurance that funded charities have contingency plans, including for a delivery successor who can ensure beneficiaries continue to receive support were they to close. In 2019, the Cabinet Office introduced a requirement that organisations providing a public service must evidence ‘living wills’ to deal with contingencies, which may address this recommendation. A ‘living will’ could ensure a more orderly winding up of a charity thereby ensuring that its vulnerable beneficiaries do not experience a break in the support they were receiving.

Lessons for the Charity Commission

As well as its impact on trust and confidence in charities, the events surrounding the closure of Kids Company raised questions about the Commission’s regulatory role. We faced political and public scrutiny into our ability to hold high-risk charities (including those who operate within them) to account, and how effectively we intervene when - if possible, before - things go wrong.

In its 2016 report on the closure, PACAC put forward recommendations for the Commission that were intended to strengthen our regulatory impact. We have sought to respond directly to individual recommendations and have also bolstered our regulatory toolkit more broadly.

PACAC recommended we should get better at identifying and scrutinising charities that operate in high-risk areas. We are becoming more sophisticated at identifying charity financial risk. We are investing in technology that will steer when and how we engage with charities presenting financial risk factors and a better set of indicators that form a financial risk assessment, including significant or rapid growth. As a result, we should be better able to be proactive, for example assessing charities’ ability to meet the opportunities and risks brought about by growth. Being more proactive should help identify and mitigate factors like those that we have seen in the closure of Kids Company sooner.

PACAC also recommended we review and improve our guidance to better facilitate charities’ understanding of their legal responsibilities. We have strengthened our reserves regulatory toolkit, blogged about charities facing financial difficulties, and hosted outreach events for trustees. We have also published guidance for auditors and independent examiners regarding their duty to report matters of material significance to us.

PACAC also highlighted how we might expand our complaints process, and signpost it more effectively. “Better handling of complaints” was built into our 2018–2023 strategic plan. Our refined processes ensure a timely, risk-based assessment of complaints. We continue to review our handling of complaints about charities as part of our cycle of continuous improvement. We also encourage trustees to tell the Commission about serious incidents that occur in their charities and, importantly, what they are doing about it. We see the reporting of serious incidents by trustees as a positive and proactive approach to governance. Both improved complaint handling and trustees reporting serious incidents to us means we are better able to listen and respond when trustees, members of the public, parliamentarians, or the media tell us something is not right.

£7.3bn was allocated by Central Government to UK charities in the financial year to May 2019. Government and other institutional funders play a significant role in the ‘charity ecosystem’ and influence the behaviours of charities. In choosing to fund a charity with public money, government may signal tacit support for that charity and its approach, which can in turn encourage other donors. We have introduced new questions as part of our registration process to identify and engage with prospective charities that are wholly or partially reliant on central or local government funding, to help them consider and manage the risks inherent in that dependence, and the expectations that come with such funding.

By drawing out the lessons from inquiries, the Commission hopes to illustrate the real risks that can threaten charitable organisations, and to encourage active steps to avoid them. While the conditions surrounding Kids Company’s governance and approach were unique, its operating model and hand–to–mouth reliance on short–term government grants were not. Charities of all sizes, in all corners of the sector, can find parallels between themselves and some of the individual factors that, taken together, led to the Charity’s closure.

The Commission invites all trustees to consider the wider lessons laid out here in the context of their own charity, to discuss the recommendations, and record (and where appropriate, publish) decisions taken as a result. We also urge funders to recognise their role in encouraging good governance, sustainability of services and helping charity to continue to thrive and inspire trust.

1. [2021] EWHC 175 (Ch) ↩

2. When and how the Charity Commission appoints Interim Managers ↩

3. Includes employees, self-employed contractors and agency workers ↩

4. Charities (Accounts and Reports) Regulations 2008, regulation 40(3)(p) ↩