Peter Barton FCA
- Audit Senior Manager
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The Charity Commission has published its report on the collapse of the charity, Kids Company. This report follows the conclusion of the High Court proceedings in 2021. Whilst agreeing with the High Court judgement that there was no dishonesty, bad faith or inappropriate personal gain, the Commission has reported a formal finding of “mismanagement in the administration of the charity”, primarily due to its repeated failure to pay creditors (including staff and HMRC) on time.
Kids Company was an unusual charity in many ways, but the Commission has highlighted the following lessons for charities, and the Commission itself, to learn, including:
Trustees must remember that they are responsible for charity’s wellbeing and delivery of services to beneficiaries. A strong CEO can be good for the charity but it must be remembered that the CEO is accountable to the Trustees. Although it has not found to have happened in this case, there is a danger that a strong CEO can lead to unhealthy Board dynamics and poor decision making. Charismatic individuals (especially founders of charities) must be mindful that a permanent leadership role is rarely in the charity’s best interests. Their undoubted passion and enthusiasm should be harnessed in different ways, without their having executive power.
In addition, wherever possible, charities should have Trustees with appropriate expertise in the services provided by the charity. The report into Kids Company indicated that the Board lacked expertise in the field of psychotherapy and youth work, which potentially limited the ability to challenge executive decisions.
A charity’s innovative approach must be balanced by strong management of commensurate risks. Such innovative approaches should not necessarily be discouraged as they keep the sector dynamic, but Trustees must remember that impact measurement should be part of the evaluation process. Charities deliver public benefit in many different ways, but innovative approaches must be properly managed.
It was concluded that the Kids Company Trustees were aware of the risks arising from the operating model, but they did not act quickly enough to build up the reserves necessary to support this model.
The report found that Kids Company operated a high-risk business model, mainly due to its rapid expansion. Expenditure increased without the certainty of a secure income stream, meaning that the charity’s low level of reserves made it vulnerable to external pressures. Indeed, the report comments that a higher level of reserves may have allowed the charity to avoid liquidation, to have wound up in a more orderly way, or to have merged with another charity.
Trustees must ensure that charities have a proper reserves policy, which accurately states the minimum level of reserves necessary for it to survive unmanageable external factors. In addition, Trustees should check how actual reserves compare to their reserves policy on a regular basis.
Kids Company failed because it grew too quickly. Charities should ensure that infrastructure, governance and resources keep pace with their growth. A sustainable level of income is needed to support growth and policies should be scaled up to reflect the needs of the expanded or new beneficiaries. Ideally, at least one Trustee should have had experience of managing a charity of a similar scale.
The circumstances of Kids Company’s collapse are relatively unusual. Not many charities experience the growth or public acclaim experienced by Kids Company. As a result, the circumstances of its collapse are unlikely to be repeated in other charities. However, there are lessons to be learned from its collapse, both for other charities and the Charity Commission as summarised above.
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