Kids Company – Lessons for trustees and charity management

The recent coverage of the demise of Kids Company provides little cheer for any of its stakeholders, management, trustees, the Government, the Charity Commission and professional firms.

We have recently seen the publication of the first report on the collapse of Kids Company; the report from the House of Commons Public Administration and Constitutional Affairs Committee (“the Report”). This is not the only report we will see; the police have held an investigation into claims of physical and sexual abuse at the charity and have announced it had found no evidence of criminality. The Charity Commission’s own investigation is ongoing (it commenced in August 2015) but welcomes the Report. The National Audit Office says the charity received at least £46m of public money despite repeated concerns over management. The media have published much about the failure, both at the time the charity collapsed, and again in the last couple of days, as the committee report has been published. We suspect that there will be more to say when the Charity Commission finally complete their investigation, but there are some obvious lessons that all charities should be considering now. Therefore, we would urge all charity trustees and senior executives to read this report as there are many lessons to be learnt regarding management and governance. 

We summarise here the key matters raised in the report and some questions you may want to consider. We also highlight a further consideration regarding reliance on grants and donations.

Reputational risk
The Report places primary responsibility for the collapse with the trustees, and in particular noting that the charity was so vulnerable to the impact of the allegations of sexual misconduct, because of its persistent weak financial position and the effect of the allegations on its fundraising.

Is your trustee board fully aware of the impact of how the charity conducts its activities and how would you cope with a serious incident or allegation?

Suitably qualified trustees
The report refers to the Charity Commission guidance which requires trustees to “make decisions solely in the charity’s interest so they should not allow their judgement to be swayed by personal prejudices or dominant personalities”. 

There was no-one on the board with the necessary experience of youth services or psychotherapy necessary to interrogate the decisions of the Founder/Chief Executive. It is essential that trustees of all charities ensure that some members of the board have experience of the area relevant to the charities activities, in addition to the necessary skills that all trustees should possess, including the appropriate attitude towards responsible governance.

Are you satisfied that your trustee board has the right skills, time and reputation to serve the charity? Do you have enough trustees on your board who have direct relevant experience of your core activities?

Public benefit
The Report, whilst acknowledging that Kids Company provided valuable support to many vulnerable young people, noted that it was a considerably smaller scale that it claimed in its publications and annual report. Many charities use statistical information in their trustees report to demonstrate how they meet the public benefit standard, as it is important that all such information used is appropriate and cannot be challenged.

Do you know if your charity is putting out accurate and reliable information into the public domain?

Financial management – reserves
The Report goes into a great deal of detail in respect of the financial management of the charity and in particular, the demand led model of operation, which meant that the charity was constantly operating on low levels of reserves. Examples given included failure to pay tax bills in a timely manner over a number of years, and reference is also made to management letters written by the current and previous auditors referring to the charity being in a “potentially insolvent situation”, “had a history of spending over budget”,and “negative publicity and reputational damage”. What is clear is that there appeared to be no attempt to build up the reserves despite advice to do so, and whilst charities are always concerned that a perceived high level of reserves would damage their fundraising.

We strongly recommend that trustees in conjunction with senior management make a realistic attempt to not only define what an acceptable level of reserves should be, but requires them to explain the rationale for the basis used. Potential donors will understand.

Do you know what level of reserves are required for your charity to operate effectively?  How would you know when your charity falls into financial difficulty?

Charitable expenditure
There is much comment in the Report as to whether certain expenditure incurred met the charities objectives, and this must be viewed separately from whether proper financial controls were exercised. The fact that the audit process identified that payments were “properly authorised and correctly treated through the system” would not itself flag up that expenditure was not in line with charitable objectives. It is only when a particular invoice in a sample is identified as being subject to query that this would come to light and even then, even after further investigation and an increase in the level of testing would unlikely impact on the audit report (unless there were material amounts) and would only feature in the management and governance letter if this was a systemic issue. There may be more to be reported on this issue as we await the Charity Commissions report.

Do you know if there is any expenditure incurred by the charity that is not in line with your charitable objectives?

We would urge all charities to re-examine their own practices and procedures in the light of the issues highlighted above.

Reliance on non-publically funded grants and donations
One important element to the coverage which was not picked up by either the media or in the Report was the charity’s reliance on non-publicly funded grants and donations. 

Our analysis of the income reported in Kids Company’s accounts suggests that over the past four reporting periods, charitable trusts and foundations more than doubled their contributions to become the largest source of funding to the troubled charity.

This increase matches a more general growth in the role of charitable trusts and foundations. Today for every £1 of expenditure spent on humanitarian aid, 22p comes from such sources. Within the UK alone, research suggests that the largest 500 UK foundations account for annual grants of over £3.1 billion.

For recipient charities and Non-governmental organisations, this rise in private donations has been welcomed with private donations since the 2008 global financial crisis continuing to increase in nominal terms, ameliorating reductions in government funding over the same period.

Many grant-giving trusts and foundations proudly observe that their funds are able to achieve more than those from public sources as they tend to attach fewer conditions to their award letters, offering the recipient lower compliance costs and greater leeway for funding their core running costs. Without the need to demonstrate value for money or accountability back to the taxpayer, the private donor is freer to fund higher risk projects and charities, as well as those who might be deemed too politically sensitive for publicly-funded donors to support.

At the same time, however, these donors need to balance these benefits against the risks that they face, many of which are common to more traditional, publicly-funded sources.

Through our experience, Moore Stephens has identified three key risk types which help all types of donors to mitigate through the design and implementation of appropriate and proportionate financial management control systems:
  • financial risk (the risk that donations are being misappropriated or diverted away from anticipated programme activities);
  • reputational risk (the risk to the organisation and benefactor(s) that their funds were being spent in a wasteful manner, or on activities which could bring the donor into disrepute); and
  • performance risk (the risk that a programme fails to deliver maximum benefits to end-user beneficiaries from the finite resources provided).
As the scale of foundation and charitable grant-giving increases, so are levels of scrutiny. Are you prepared for this? How can you demonstrate that your funds are being appropriately managed by your grant recipients? Some simple questions to ask yourself when considering these issues include:
  • How do your grant award letters/agreements adequately to protect your organisation?
  • How do you ensure prospective recipients possess the financial capacity to be adequate stewards of your funds?
  • How can you rely on the accuracy of information provided from recipients?
  • How can you best demonstrate value for money and accountability back to your ultimate funders in a way they will value?
With over 25 years of experience dedicated to working with donors, we are uniquely placed to help trustees and management of foundations and charitable trusts mitigate these risks and answer these questions. Taking a comprehensive approach, we ensure accountability back to the ultimate funder (including shareholders in a parent company, celebrity-founders and high net worth individuals), from their donation all the way through to the end-user beneficiary. We recognise that different donors have different risk appetites and objectives and adapt our recommendations according to these criteria.

Our international presence has seen us deliver assurance and advisory services to a range of donors with over 1,500 assignments delivered each year across more than 100 countries. Whether you fund programmes in Leytonstone or Lilongwe, our understanding of local circumstances and practices ensures that the advice we provide is tailored to your requirements.

As the role of the foundation and grant-giving charity continues to rise, donors operating in this space are under increasing pressure to ensure that good intentions are supported by proportionate financial management systems. Kids Company has caused embarrassment for many charitable trusts, grant-giving trusts and ultimate parent company/celebrity funders.

For more information as to how organisations like yours can avoid a similar fate, please do contact a member of our team.