4Charity Commission
Monitoring of Kids Company’s finances
99.Although Kids Company’s finances were precarious for most of its existence and generated controversy and concern, the Charity Commission did not intervene because “the issue of insolvency in itself is not necessarily a regulatory issue”.167 Ms Michelle Russell, Director of Investigations, Monitoring and Enforcement at the Charity Commission, pointed out that the charity had an “unqualified audit report, so it was signed off as a going concern each year, albeit there were comments made about or known about its cash-flow areas”.168
100.The Charity Commission only has the power to intervene in the governance of an individual charity if there are specific concerns relating to mismanagement or misconduct.169 The Charity Commission stated that it had had no reason to investigate Kids Company before 2014, and received “remarkably few complaints about Kids Company before this summer”.170 It has been reported in the media that the Pilgrim Trust reported concerns about Kids Company to the Charity Commission as early as 2002, but the Charity Commission no longer holds records of its response and has been unable to clarify what action it took.171 William Shawcross, Chair of the Charity Commission, told us that he “wish[ed] we had had a regulatory cause to investigate the charity much earlier”.172
101.The Charity Commission did discuss Kids Company’s finances with the charity at several points in the year leading up to its collapse, in response to contact from the charity’s management and negative press coverage. The first meeting took place in March 2015. During this meeting, the Charity Commission “did have the conversation…about the reserves and the financial stability of the organisation” but noted that Kids Company “had a plan in place” to address the funding situation.173 The Charity Commission had no regulatory role in overseeing the execution of this plan, as “restructuring and getting a charity back on a footing that is financially stable is not necessarily a regulatory issue”.174 However, it left an “open door” for the Charity Commission, who asked to be kept informed about what was going on, “particularly in relation to the financial stability of the organisation”.175
102. Over the next two months, the Charity Commission received several updates from Ms Batmanghelidjh, but the Trustees also warned the Commission that funding difficulties continued and a restructure or potential closure might occur. Throughout July, the Charity Commission kept in close contact with the Cabinet Office and Kids Company in relation to the allegations under investigation by PwC and the funding situation. On 4 August, Kids Company informed the Charity Commission that it would be closing the following day. On 21 August, the Charity Commission announced a statutory inquiry into Kids Company’s governance and financial management “in light of the intense public scrutiny and speculation over the charity’s activities, and the increasing number of allegations in the public domain about its governance and financial management”.176
103.The Charity Commission’s investigation is ongoing, and we await its conclusions. However, Ms Russell acknowledged that there were already several learning points for the Charity Commission from the collapse of Kids Company. First, she noted that even if a charity has an unqualified set of accounts, “there still may be issues about financial stability, and that is a lesson not just for us, but for the sector and the public themselves”.177 Ms Russell indicated that the Charity Commission has limited IT capability to interrogate the 60,000 sets of annual accounts it receives each year but has a “plan in place” to address that capacity issue.178
104.A second area of learning is in relation to reserves. Ms Russell and Mr Shawcross stated that the Charity Commission must “tread the line carefully about not fettering or interfering with Trustees’ discretion” but said the Commission would “clarify and sharpen up our guidance in light of what has happened over the summer”.179
105.It is remarkable that so few people thought it appropriate to complain to the Charity Commission about Kids Company, despite donors and others expressing concerns as far back as 2002, and open adverse comment about Kids Company in the media. This reflects the Charity Commission’s failure to make people aware of this possibility. Complaints would have prompted investigation and could have led to improvements in the charity’s governance and operations.
106.In the months leading up to Kids Company’s collapse, the Charity Commission worked closely with the charity after receiving complaints from a donor and former employees, but substantive discussions about its precarious financial situation only occurred after the charity’s finances reached crisis point. Earlier intervention from the Charity Commission to advise changes to the operating model might have helped to safeguard the charity, although this has not historically been the role of the Charity Commission. The Charity Commission must make its own judgement about a charity, rather than simply relying on government engagement with an organisation as evidence of a charity’s good governance or effectiveness.
107.We welcome the provisions in the Charities (Protection and Social Investment) Bill to give the Charity Commission new powers to disqualify a person from being a charity Trustee if: at least one of six conditions applies to the individual; if an individual is unfit to be a Trustee; and if making the order is desirable in the public interest in order to protect public trust and confidence in charities (either generally or in relation to the charities or classes of
charity specified or described in the order). Amongst the six conditions that may, in conjunction with the tests mentioned above, disqualify a person from being a Trustee is if a the person was a Trustee, charity Trustee, officer, agent or employee of a charity at a time when there was misconduct or mismanagement in the administration of the charity, and was: responsible for the misconduct or mismanagement; knew of the misconduct or mismanagement and failed to take any reasonable step to oppose it; or the person’s conduct contributed to or facilitated the misconduct or mismanagement. The Charity Commission’s new powers may be applicable to the case of Kids Company.
108. There are both legal parameters and resourcing issues that currently limit what the Charity Commission can do to improve the effectiveness of a charity’s governance. It is the role of Trustees, not the regulator, to ensure that a charity is well run. However, if the Charity Commission is to maintain public faith in charities and deliver on its statutory duty to prevent, detect and tackle mismanagement in charities, it must have the resources and powers to advise and investigate charities at an earlier stage and to support charities through restructures and downsizing.
109.While it is not possible for the Charity Commission to interrogate deeply the 60,000 accounts it reportedly receives each year, high risk charities – for example those with a large number of employees or a vulnerable client base – must be under the greatest scrutiny. We await with interest the outcome of the Charity Commission’s technology transformation plan, which should enable the Commission to identify and scrutinise high-risk charities.180
110.Trustees must have ultimate responsibility for ensuring that a charity has a responsible approach to reserves but the Charity Commission must do more to help to make Trustees aware of their responsibilities in this area. We look forward to the Charity Commission’s reviewed guidance on charity reserves, and expect it will impress upon Trustees of large or complex charities their increased responsibilities in this area.
111.The Charity Commission should revise its guidance to auditors, to ensure that expectations about auditors’ reporting duties under Section 156 of the Charities Act 2011 are appropriately conveyed. Such guidance must be clearer on the circumstances in which auditors should pass on concerns about an unsustainable operating model, including an inappropriate reserves policy.
112.The Charity Commission should consider how it can better impress upon Trustees the need to ensure that the Board includes those with appropriate experience of the areas relevant to the charity’s activities. Some Trustees must have this relevant experience, so that they can evaluate the quality of the charity’s activities, and a range of skills must be reflected on the Board. All Trustees must have a responsible attitude towards governance.
Donor complaint
113.Prior to July 2015, the Charity Commission stated that it had received only one donor complaint about Kids Company – from an individual who had sold her house to donate to Kids Company, and was unhappy with how the charity had handled her donation.181 She requested that her donation be returned, and complained to the Charity Commission in October 2014.182 Ms Batmanghelidjh told PACAC that “the Charity Commission advised us not to return her money”.183 The Charity Commission stated, however, “that there is nothing on record showing or suggesting that our advice was sought or given on repaying the donation”.184 Mr Shawcross also commented that, as the donor “had not placed any limitations on the way in which the money was spent”, it was “rather difficult to insist that the money be repaid,” as Kids Company had not acted illegally.185
114.In light of the Charity Commission’s evidence, Kids Company subsequently explained that “there is a difference of recollection as to whether advice was given or not.” Mr Richard Handover, Deputy Chair of the Trustees, recalled “a long discussion [with the Charity Commission] about [a donor complaint] where it was acknowledged we had provided full documentary evidence that the money had been spent in line with the donor’s request. After a full discussion there was never any suggestion that Kids Company should repay the money”.186 Ms Batmanghelidjh, however, stood by her recollection “that the Charity Commission explicitly advised Kids Company not to return the money”.187
115.Although Ms Batmanghelidjh stated that the Charity Commission had told Kids Company that “there are no issues in relation to the case,” Mr Shawcross said that the case “obviously illustrates a donor who was not looked after properly” and judged that it was “the fault of the charity that she was not treated better”.188 Ms Russell explained that the Charity Commission concluded that the charity had done nothing illegal, but “there is a moral code and culture that transcends here that goes to good governance and good practice”.189
116.Ms Russell stated that the breakdown of the relationship between the donor and Kids Company should act as “a timely reminder to all Trustees that they are accountable to their donors”.190 Mr Shawcross has pledged to “enhance the [Charity Commission’s] advice in terms of…looking after donors properly”.191
117.The conflicting accounts offered by Kids Company and the Charity Commission about whether guidance was given about returning a large donation, and the propriety of Kids Company’s behaviour in this case is cause for concern. The Charity Commission’s resources and existing statutory framework prevent it from intervening in donor issues that do not involve illegality – but the Charity Commission has not presented any evidence which conveys the disapproval that they have voiced subsequently. We are pleased that the Charity Commission will be reviewing their guidance about managing relationships with donors. This guidance must better communicate the duties of charities towards their donors.
118.In all communications with charities regarding individual donor complaints, the Charity Commission must communicate any advice to a charity in writing, even if there has been no illegal activity on the part of a charity.
The role of the Charity Commission
119.Sue Berelowitz, former Deputy Children’s Commissioner, stated that “it is possible that I should have contacted the Charity Commission” in relation to her concerns about the charity, but “there was not a clear avenue for me to go down”.192 Similarly, Nick Brooks, on behalf of the Kids Company auditors, said he “had not considered” reporting the fears about the charity’s unsustainability to the Charity Commission but would consider this “going forward”.193
120.It is a matter of some concern that a number of witnesses who had grave concerns about the charity did not alert the Charity Commission. As Mr Brooks’s and Ms Berelowitz’s comments indicate, the Charity Commission projects too limited a public profile to provide much reassurance about charities and their regulation, and to attract complaints. If individuals are to understand the role of the Charity Commission, then the Charity Commission needs to be seen to be actively holding charities to account.
121.The Charity Commission must do more to make the public aware that they can and should take their concerns about a charity to the Charity Commission. The Commission should investigate adverse media reports about a charity and encourage journalists to make formal complaints to the Charity Commission, rather than relying upon the Charity Commission to chance upon their reports. Its guidance should also urge Trustees to make donors, employees and beneficiaries aware that they should complain to the Charity Commission if they have serious concerns about the governance of a charity.
122.The Treasury and Cabinet Office must address the future funding of the Charity Commission so that it can carry out its functions in the way that Government, charities and the public expects.
123.In order to underline the constitutional status of the Commission’s Board, the Commission should restore the proper title of its Board members, so they are known as the Charity Commissioners. This would both restore their unique status, and underline that the Chair and his fellow commissioners are jointly and severally liable for the conduct of the Charity Commission in England and Wales, just as a Chair and other Trustees should understand how they are responsible for a charity they govern.
167 Q455, [Michelle Russell], oral evidence, 03.11.2015
168 Q455, [Michelle Russell], oral evidence, 03.11.2015
169 Tackling abuse and mismanagement. Annex 1: the Charity Commission’s approach to tackling abuse and mismanagement
170 Q434, [William Shawcross] oral evidence, 03.11.2015
171 Kids Company concerns raised as early as 2002’ (14.10.2015, BBC). The same article also noted that New Philanthropy Capital raised concerns about Kids Company’s governance, a lack of outcome data, and inappropriate use of funding to Trustees in 2006, but did not take these concerns to the Charity Commission.
172 Q459, oral evidence, 03.11.2015
173 Qq469, 455, [Michelle Russell] oral evidence, 03.11.2015
174 Q455, [Michelle Russell] oral evidence, 03.11.2015
175 Q444, oral evidence, 03.11.2015
176 Press release, The Charity Commission, New charity investigation: Kids Company, 21 August 2015
177 Q510, oral evidence, 03.11.2015
178 Q469, oral evidence, 03.11.2015
179 Q467, oral evidence, 03.11.2015
180 Ms Russell explained that the Charity Commission is seeking to use its £8 million Invest to Save grant to “make improvements and developments…in our risk assessment of the different types of risks for different types of charities…we will look at different formulas for different types of charity, for different types of risk.” Q470 oral evidence, 03.11.2015
181 Q435, [Michelle Russell] oral evidence 03.11.2015
183 Q241, oral evidence, 15.10.2015
184 Email from Charity Commission to Kids Company cited in KCI47 (Camila Batmanghelidjh and Alan Yentob)
185 Q501 [William Shawcross], oral evidence, 03.11.2015
188 Q242, oral evidence, 15.10.2015. Q501, oral evidence, 03.11.2015
189 Q502, oral evidence, 03.11.2015
190 Q502, oral evidence, 03.11.2015
191 Q506, oral evidence, 03.11.2015
192 Q528, oral evidence, 17.11.2015
193 Q503, oral evidence, 17,11.2015
© Parliamentary copyright 2015
Prepared 28 January 2016