Public Administration and Constitutional Affairs Committee
Oral evidence: Whitehall’s relationship with Kids Company, HC 433
Tuesday 17 November 2015
Ordered by the House of Commons to be published on 17 November 2015.
Written evidence from witnesses:
– Alastair Duke, Partner, PKF Littlejohn
– Nick Brooks, Partner, Kingston Smith
– Sue Berelowitz, former Deputy Children’s Commissioner
Members present: Mr Bernard Jenkin (Chair); Ronnie Cowan; Oliver Dowden; Mr Paul Flynn; Mrs Cheryl Gillan; Kate Hoey; Kelvin Hopkins; Mr David Jones; Gerald Jones; Tom Tugendhat; and Mr Andrew Turner.
Questions 245 - 548
Witness: Will Richardson, Partner, PricewaterhouseCoopers, gave evidence.
Q245 Chair: Welcome to this further public evidence session on Kids Company and how the Government came to hand over grants to Kids Company in its latter period. Welcome to our witness. I wonder if you could identify yourself for the record, please.
Will Richardson: Good morning. My name is Will Richardson. I am a partner in the Forensic Services Team at Pricewaterhouse Coopers.
Q246 Chair: By forensic services we mean civil and criminal investigations, regulatory and non-financial reporting irregularities, fraud, bribery, corruption and non-financial matters and professional negligence.
Will Richardson: A bit of a mouthful, isn’t it. Yes
Chair: Is that correct?
Will Richardson: Yes. I spend all of my time or most of my time investigating. I have been at PwC for 22 years and since 1999 I have been a dedicated forensic accountant.
Chair: You seem to have the right experience to study this particular problem and to advise the charity on its issues. We are going to ask fairly crisp and short questions. We would be very grateful if you would answer fairly crisply in return. I am going to ask Kate Hoey if she will ask the first question.
Kate Hoey: Good morning, Mr Richardson.
Will Richardson: Good morning.
Q247 Kate Hoey: You were engaged to carry out this review on 23 July this year. Who engaged you?
Will Richardson: It was the charity; Kids Company engaged me.
Q248 Kate Hoey: Did you get a phone call?
Will Richardson: Yes, we were contacted on Tuesday 21 July. We spoke with the charity that evening. The charity provided us with the allegations that the charity had received from the Charity Commission, together with a précis of those allegations. We drafted a scope of work and set that out in our engagement letter, which I believe the Committee has seen. We sent that to the charity on the Wednesday—and I believe that was shared with the Charity Commission—and we commenced our work in earnest on Thursday.
Q249 Kate Hoey: Then you reported preliminary findings on 26 July?
Will Richardson: The morning of Sunday 26 July, yes.
Q250 Kate Hoey: Three days. Did you work all night?
Will Richardson: I have a team of four people working with me. To go back to the Chairman’s question on expertise, that team included a senior manager who is an experienced investigator and was the global head of counter fraud at a global charity. One of my managers who has extensive experience in—
Kate Hoey: Yes, but did they work all night?
Will Richardson: In three days we worked just under 100 hours.
Q251 Kate Hoey: Right. Who made the decision then that the preliminary findings should be released just three days after you started? Who decided to release them?
Will Richardson: When we were contacted by the charity on the Tuesday we were asked for an answer to the allegations by that Thursday evening. I then explained that pragmatically that was not possible, so we agreed to look into certain of the specific allegations, on the undertaking that we would cover what ground we could in the time available and provide a progress report that weekend.
Q252 Kate Hoey: Who asked you to release it? Who released it publicly?
Will Richardson: To talk you through my understanding and my knowledge: I was aware that the Charity Commission would receive a copy of the report, so I spoke with the Charity Commission on the afternoon of Sunday 26 July, in relation to releasing it to them. To the best of my knowledge, it had been released to only two groups—the Kids Company and the Charity Commission. I was not aware that it had been passed on after that.
Q253 Kate Hoey: What was the reason for this quick turnaround? Who demanded that turnaround? Was there a reason given to you? I am sure you don’t take on many investigations where they say they want a decision in three days.
Will Richardson: Most investigations need a decision or an understanding fairly quickly. My understanding in this instance was a combination of things. Serious allegations had been received by the charity, and they wanted an answer to that. I was also aware that the charity was in financial difficulty and that there were some discussions in relation to potential changes to some of the trustees of the charity. How those factors interplayed to create a very short timescale I am not sure.
Q254 Kate Hoey: Did you know that the Cabinet Office was waiting to give some money?
Will Richardson: No, I did not.
Kate Hoey: You did not know anything about that?
Will Richardson: Not that the Cabinet Office was waiting to see our report before any decision was taken.
Q255 Kate Hoey: You did not get any feeling that the Cabinet Office was putting on any pressure to get it speeded up?
Will Richardson: I can’t recall an explicit conversation in relation to that. As I say, I was aware that the charity was in financial difficulty.
Q256 Ronnie Cowan: These three days, did this not strike you at all as being unusual? Have you ever done this in the past? Is that a normal span of work, five people for three days, 100 man hours? Three days, five people, was that a six or seven hour working day?
Will Richardson: My team were working until the early hours each morning, absolutely. It is not unusual when allegations are received that a client needs to respond very, very quickly and to understand what is going on. I would emphasise, though, that the three days in which we performed stage 1 of our work before we reported our preliminary interim findings, was the start of an investigation. Apart from one of the allegations, our work was not complete.
Q257 Ronnie Cowan: I think I am right in saying you described the nature of the work as very limited.
Will Richardson: Yes, we looked into really factual processes in place in relation to certain of the allegations and covered as much ground as we could in the time available on those processes.
Q258 Ronnie Cowan: Were you in a position where you could say, “It simply isn’t long enough to do the detailed work” to the client?
Will Richardson: I made it very clear that—as I think I mentioned earlier—in three days we could not answer the questions raised by the allegations but, in relation to five of those allegations, we would cover what ground we could and report back progress that weekend, but we would not be complete by that weekend.
Q259 Ronnie Cowan: A rough estimate, given what you know now; how long do you think that investigation should have taken?
Will Richardson: If the investigation had continued by way of a phase 2—I think the Committee has a copy of the proposed engagement letter—I think a further four weeks were envisaged.
Q260 Chair: What reason did Kids Company give PwC for wanting this so urgently?
Will Richardson: The factors that I was aware of at that point in time were the seriousness of the allegations and the fact that the Charity Commission wanted an independent investigation to be undertaken.
Q261 Chair: What assurance do you think could be given by the work you completed and gave to them? What assurance do you think anybody could take from that work?
Will Richardson: Yes, I think if I may I would not use the term “assurance”. The way I would summarise the output of the work that we were able to achieve in three days would be probably this: we had undertaken three calendar days of work. We had covered as much ground as we could in that time, but we had undertaken three calendar days of work. We had only looked into five of the allegations out of eight that had been received. Of those five allegations, we had covered off only one and “covered off” meant completed our work and, in terms of that one allegation, determined that there was no substance to it. For the other four allegations that we had looked into we had undertaken a number of steps, such as determining what payments had been made and what supporting documents there were. But we had made it clear that our work had not been completed.
Q262 Chair: What did Kids Company say they were going to use this report for?
Will Richardson: To understand whether there was any factual basis for the allegations.
Q263 Chair: To what extent did what you produced to them provide any factual basis for those allegations or otherwise?
Will Richardson: In relation to the five specific allegations we looked into, it determined that there was no basis for one of the allegations and started to give a sense of direction of travel in relation to the other four, but the work was not complete.
Q264 Chair: How aware were you that this was going to be passed to the Charity Commission and the Cabinet Office?
Will Richardson: The Charity Commission explicitly so.
Q265 Chair: Right. What assurance did you expect the Charity Commission to draw from this report?
Will Richardson: My understanding at that point in time was that the Charity Commission just wanted to know, by way of an independent investigation, whether there was any substance to the allegations.
Q266 Kate Hoey: Had PricewaterhouseCoopers done some work for Kids Company before, ever? Had you done some work for Kids Company?
Will Richardson: Earlier this calendar year we had provided two junior members of staff on two two-week secondments.
Q267 Kate Hoey: Sorry, I should have read it up, but are you a senior person in this huge organisation?
Will Richardson: I am a partner at PwC, yes.
Q268 Kate Hoey: Did the request come to you?
Will Richardson: No. For those secondments?
Kate Hoey: Yes, for this July—
Will Richardson: No, the first contact was between Kids Company and our person who leads on UK charities. That person then passed it on to the people in the firm with the relevant experience; my team.
Q269 Kate Hoey: Do you think they were told more than you were or would your person have told you everything that Kids Company told you?
Will Richardson: I believe so.
Q270 Chair: How surprised are you that the Government used this report as a justification to make a payment?
Will Richardson: I think at that point in time we were just working to the scope of the investigation. We did not have any insight into what would be used in terms of the report and any payments that had been made. My understanding was this was a report, a piece of work to help the charity and the Charity Commission to understand whether there was any substance to the allegations that had been made.
Q271 Chair: How worthwhile was this piece of work?
Will Richardson: I will caveat that in that it was three days’ worth of work or three calendar days’ worth of work. Within those three days we had covered off one of the allegations and made inroads into four of the other allegations. If it had completed, we would have been able to cover off all eight allegations.
Q272 Chair: In terms of providing assurance, it was not providing assurance on the scope of the request that had originally been made to you?
Will Richardson: Sorry to sound like I am repeating myself, but we had identified through our work that one of the allegations did not have any substance—
Q273 Chair: Yes, you are repeating yourself, so I will cut you off I am afraid. Basically you are saying this piece of work was not worth very much on its own; it was very limited?
Will Richardson: I would agree that it was limited, but I would not necessarily agree with the characterisation that it wasn’t worth anything.
Chair: Obviously not, because you got paid for it.
Q274 Kate Hoey: Yes. How much were you paid, not you personally but the company?
Will Richardson: We were paid £26,300 for our time costs and just over £1,000 for expenses, which were largely accommodation costs because the team were working until the early hours of the morning so they stayed close in town.
Q275 Mrs Cheryl Gillan: Yes. Can I ask, weren’t you surprised that you were commissioned by Kids Company and not by the Charity Commission? That was who you knew it was for.
Presumably with this direct approach, there was no competitive tender at all. You were not up against any other company. It was just a direct approach to PwC?
Will Richardson: If I may take those questions in reverse order, I was not aware of any competitive process that was going on behind the scenes. There may or may not have been. I am simply not aware.
I was not particularly surprised that Kids Company approached directly because our work was simply being commissioned by Kids Company, but the Charity Commission would receive the report as well.
Q276 Kelvin Hopkins: Could you be a bit more specific about which allegations you did feel had not been satisfactorily resolved? Which questions remained for the follow-up report?
Will Richardson: Yes, if I can run you through the eight allegations and my findings in relation to each.
The first allegation, which we had completed our work in relation to, was an allegation that an employee had received a pay rise in lieu of being unsuccessful in obtaining a promotion. We did not find any evidence to support that.
The next four allegations, if I can quickly summarise those. One was an allegation that a beneficiary was also being paid as an employee. Secondly, there was an allegation that the charity was paying education costs and accommodation costs for an individual in order that that individual could obtain a student visa, and there was a connection between that individual and Ms Batmanghelidjh. Thirdly, there was an allegation that a certain trustee financial control was being circumvented. That financial control introduced at the end of 2014 was that trustees had to sign off on any expenditure over £5,000. Lastly, there was an allegation that the child of an employee was inappropriately receiving a benefit because they were not a beneficiary. If I can put all four of those allegations together, our work looked at what payments had been made to those people and what supporting documentation existed. To give the Committee a flavour there, we requested and received almost all—approximately 1,000 items—of supporting documentation in the time we had available, so what documentation had been available, whether those payments had been authorised and then, lastly, whether those payments had been paid to a beneficiary that appears on the charity’s AURORA beneficiary system, so whether ostensibly they had gone through the clinical acceptance procedures for beneficiaries. Those are the four very specific work steps that we had been able to undertake. We had a couple of outstanding questions.
The other things we would have gone on to in stage 2, in relation to those four allegations, would have been to check the documentation trail, to see that those beneficiaries had gone through the normal clinical acceptance procedures; to look at the connection between the clinically assessed needs of those individuals and the payments made in relation to those needs and whether the two joined up; and also to corroborate some of the explanations that we received as part of our phase 1 work.
The other three allegations that would have taken place during stage 2, which we had not looked into as part of stage 1, would have been whether the charity was making payments outside of its objects, whether the charity had been operating on an insolvent basis—
Chair: It is taking too long.
Will Richardson: I am sorry. Finally, Mr Chairman, whether there were any implications in relation to a beneficiary on state benefits also receiving benefit payments.
Chair: Very impressive without notes.
Q277 Kelvin Hopkins: In the light of subsequent revelations, do you feel that you and your colleagues were sufficiently rigorous in your examination of what was going on?
Will Richardson: I am incredibly proud of the work that we undertook in the very limited time available, absolutely.
Chair: Moving on; Ronnie Cowan, very quickly.
Q278 Ronnie Cowan: One very brief question: given your knowledge of forensic accounting, given your inside knowledge of Kids Company, were you surprised that they got a further £4 million out of the Government so soon after your investigation?
Will Richardson: I simply don’t have a view on that. All the other—
Ronnie Cowan: You were not surprised?
Will Richardson: We were brought in to undertake a very specific piece of investigations work and that is what I am here to help the Committee with.
Q279 Oliver Dowden: If we may look at the specific items that your report highlighted, you highlighted individual items purchased for beneficiaries. These included £80 for blankets from John Lewis; men’s outerware costing £149; designer shoes for £305; and in one year you reported that over £4,700 was spent on clothing for one client. How far was it within the scope of your inquiry to consider the appropriateness of that type of expenditure?
Will Richardson: It would have been in stage 2, as I mentioned. Stage 1 was about identifying what had been paid, whether it had supporting documentation, whether it had been authorised. Stage 2 of the investigation that we never got to would have been connecting clinically assessed needs and payments made in relation to those needs. We had not progressed to considering those questions.
Q280 Oliver Dowden: What experience have you had of investigating similar charities? I suppose the point I am making is, clearly, you did not have the opportunity to investigate this in detail, but have you had experience of other charities and, therefore, could you give some sort of indication as to whether you think that would be an appropriate use of funds in a general context?
Will Richardson: I think the essential thing here would have been to marry up the particular payments made to specific beneficiaries and those beneficiaries’ clinically assessed needs. I think that is the only way you could have understood whether those payments were appropriate or not.
Q281 Chair: Are you seriously asking us to believe that you found that information and it did not raise any eyebrows in PwC at all, after 100 hours of looking at this charity?
Will Richardson: The fact that details like that are included in our preliminary interim report reflected the fact that, at face value, they are high payments, but because we had not got on to that piece of work we could not say whether or not those payments were in line with that clinically assessed person’s needs.
Q282 Chair: If you had been paid by the Charity Commission and you had uncovered those payments, what would you have done?
Will Richardson: Exactly what we did here. We highlighted them within the report. We shone a light on those payments within our report.
Q283 Oliver Dowden: If you look then at the financial controls and the spending decisions, how did those compare with other charities that you have investigated? Even if you do not look at the specific validity of the spending on those items, do you make any judgment on the financial controls that were in place to regulate that expenditure by the charity?
Will Richardson: As I said, we covered a lot of ground, albeit, in three calendar days. We requested approximately 1,000 items of supporting documentation. In all but a couple of instances, we found that we were provided that supporting documentation in very short order. In almost all, apart from two examples, we could find evidence of authorisation. In relation to this particular charity, that is all I can comment on.
Q284 Oliver Dowden: It sounds as if you are saying that the fact that you specifically highlighted these items of expenditure in your report, you were flagging it as something that was at least irregular that would require further investigation in subsequent stages?
Will Richardson: Absolutely. They would have received that further investigation by way of phase 2, yes.
Oliver Dowden: Thank you.
Q285 Ronnie Cowan: Each allegation you looked at was accompanied by a response from Camila Batmanghelidjh. One of her responses was that HMRC told her there were no issues with the support Kids Company was providing to clients. Why is the report laid out that way and did you corroborate Ms Batmanghelidjh’s answers?
Will Richardson: No. If I may answer those two questions in reverse order, in the time available we had not had time to corroborate Ms Batmanghelidjh’s answers. We would have sought to do that as part of phase 2 but, again, I thought it important to put the fact that we received those explanations into the report.
Q286 Ronnie Cowan: While we are asking, it is Ms Batmanghelidjh and not the trustees of the charity who has the responsibility ultimately?
Will Richardson: I am sure we would have got there had we been able to continue the investigation.
Ronnie Cowan: It is a great pity we did not get to phase 2, isn’t it?
Q287 Mr David Jones: You indicated that you were not aware when you agreed to undertake the work that the Cabinet Office was interested in the report that you were about to compile. When did you become aware that it did have an interest in what you had reported?
Will Richardson: My explicit memory of that is that on Monday 27 July I orally presented the contents of our report to Kids Company and the Charity Commission, and it was mentioned on that call that the Cabinet Office was waiting to see our findings.
Q288 Mr David Jones: Did that cause you any concern?
Will Richardson: Not particularly.
Q289 Mr David Jones: Did you not feel at that time that maybe you should have been made aware of the fact beforehand that the Cabinet Office had a financial interest in whatever you were reporting?
Will Richardson: Again, I was brought in to undertake a very specific investigation and report to the charity and the Charity Commission.
Q290 Mr David Jones: Did you have any communication at all with the Cabinet Office after—
Will Richardson: No, none at all.
Q291 Mr David Jones: You haven’t since?
Will Richardson: No.
Q292 Mr David Jones: Were you surprised when you discovered that the Cabinet Office had paid out a substantial sum of public money, apparently consequent upon the report you had produced?
Will Richardson: I simply was not involved or aware of those conversations in relation to that, so I don’t know the content of those conversations and what led to the payment.
Q293 Mr David Jones: No, indeed, but you must have become aware at some stage that, as a consequence of seeing your report, the Cabinet Office authorised the payment of several million pounds to Kids Company. Did that surprise you at all?
Will Richardson: I don’t have a view one way or the other. I am here to help the Committee in relation to a very specific investigation that we undertook.
Q294 Mr David Jones: Surely you must have a view, even if only as a taxpayer, as to whether it was appropriate to pay out that sum of money on the basis of that report?
Will Richardson: Sorry, I am not here as a taxpayer. I am here as a partner of PwC to help you to understand what work PwC undertook in relation to this investigation.
Q295 Mr David Jones: You have no view at all on it? Is that right?
Will Richardson: I am here to help the Committee understand the work that we undertook.
Q296 Mr David Jones: No, I appreciate that. Have you any view on the fact that that money was paid out?
Kate Hoey: Not for this Committee anyway your view. Is that right?
Will Richardson: Thank you.
Mrs Cheryl Gillan: He is being very professional.
Will Richardson: Thank you.
Q297 Chair: How do you feel about your report basically being used as propaganda to get money out of the taxpayer that clearly should not have been paid?
Will Richardson: Again, Mr Chairman, I am here to help the Committee understand the work that we undertook, what our findings were and what we would have gone on to investigate had we had the opportunity.
Q298 Chair: How much do you think “he who pays the piper calls the tune” is a sufficient justification for the professional conduct of a major firm of auditors?
Will Richardson: I am sorry; we were instructed to undertake a very specific investigation into certain allegations—
Chair: That means you think it is fine.
Will Richardson: —and we did a very good job with a very good team, which I am very proud of, in a very short period of time.
Q299 Chair: I admire the way you are supporting your staff, but can you understand why a lot of people will be quite disappointed?
Will Richardson: I have heard the views but, again, I am here to help the Committee understand the piece of work that we undertook.
Q300 Chair: What lessons do you think your firm takes from this episode about taking on work of this nature, which perhaps is being used for a purpose you did not intend it to be used for?
Will Richardson: We help our clients in difficult situations all the time. That is the nature of the work. Organisations need that assistance. If someone has then used our work for another means then that is outside our control.
Q301 Mrs Cheryl Gillan: Have you made any changes within PwC to the rules of engagement when you are asked to carry out an assignment like this, consequent on the Kids Company experience?
Will Richardson: No, but if I understand the premise of that question, it suggests that perhaps changes are required. Here we were interacting with Kids Company. The Charity Commission was aware that we were undertaking a very specific investigation in relation to very specific allegations and we responded appropriately to that within the time that we were given.
Q302 Chair: Given that your fee was probably paid out of the funds given to you by the taxpayer, what do you feel about that?
Will Richardson: Feel in what particular way?
Chair: The fee paid for the PwC work was probably paid to you out of money provided by the taxpayer. How do you feel about that?
Will Richardson: Well, the organisation had a need. It needed assistance and we provided a very experienced team to undertake the piece of work.
If your question is a wider one of our work in relation to charities in the sector then as a firm we donated fees and services valued at about £7 million last year. Over one-third of our employees volunteer their time. We are only one of only 36 companies last year that was re-accredited with a CommunityMark by Business in the Community. I am incredibly proud of what we do with charities in our community as a firm; incredibly proud.
Q303 Kate Hoey: Had you met the Kids Company chief exec before you started to do this inquiry? You had never met her personally?
Will Richardson: No.
Kate Hoey: No, okay. Thank you.
Q304 Chair: Did you ever visit Kids Company yourself?
Will Richardson: No, I had an explicit conversation with the team during those three calendar days about whether I would come in to visit, and we decided, given that we were trying to press on with so much work in the time available, that frankly I would get in the way. We had set a piece of work and the team just had to do their investigative digging.
Chair: I don’t think we have any further questions.
Oliver Dowden: Sorry, Mr Chairman.
Chair: Okay, one more question.
Q305 Oliver Dowden: One further go on this point. It is clear from what you said in answer to my questions that you made very preliminary findings. Does it concern you that the chair of Kids Company’s board of trustees has come before this Committee and used this report as a defence? Are you concerned that it does some reputational damage to PwC that this report is being used in this way by the chair of the trustees?
Will Richardson: I think the way I would characterise it is this. We covered a lot of ground in three days. We identified that one allegation was not true and we seemed to be finding out that there may not have been substance to the other four allegations. So there was no direct evidence at that point in time, with the very specific work that we had undertaken in relation to those specific allegations, but there was a big caveat that said, “Look, we have only done three days’ worth of work and before you can conclude you have to continue or finish the investigation”.
Q306 Chair: Do you think if you ever found yourself in a similar situation you would want to ask a few more questions about what this report was for and who else was going to see it?
Will Richardson: As I say, at the point in time my understanding was that these were very serious—
Chair: The answer is no. Okay, fine. Ronnie.
Ronnie Cowan: Very quickly for the record, it was the Government who handed over £4 million worth of taxpayers’ money on the basis of this account.
Chair: There are no further questions.
Will Richardson: Okay.
Chair: Thank you very much.
Examination of Witness
Witness: Alastair Duke, Partner, PKF Littlejohn, gave evidence.
Q307 Chair: Thank you for joining us. Could you identify yourself for the record, please?
Alastair Duke: My name is Alastair Duke. I am a partner in the Not for Profit unit at PKF Littlejohn.
Q308 Chair: You specialise in charities and not for profit organisations?
Alastair Duke: Yes. I have specialised for the last 17 years in the not for profit sector.
Q309 Chair: You produced a report that was commissioned by the Cabinet Office on Kids Company?
Alastair Duke: Yes. We were engaged in January 2014 to undertake a clear, restricted, focused review of the governance and financial controls at the Kids Company. That was carried out by a team of charity experts and we reported our findings to our client, the Cabinet Office.
Q310 Chair: How many hours did you commit to this project?
Alastair Duke: It was just under 100 hours, of which 38 hours were my time and—
Chair: So you were hands on?
Alastair Duke: Yes, I was involved.
Chair: We will ask short and crisp questions and we will try to keep the answers short and crisp as well, otherwise I am afraid I will pull you up.
Q311 Paul Flynn: Richard Heaton of the Civil Service told the Public Accounts Committee that the Cabinet Office commissioned a review because it was nervous about the charity’s financial controls and governance. What briefing did you receive from the Cabinet Office prior to the review? How far were you aware of these concerns that they had and the fact that this was a charity with significant ministerial support?
Alastair Duke: The work was tendered publicly. We submitted a tender and were successful in that tender. The remit was set out in the tender document.
We had a planning meeting with the Cabinet Office in which we discussed the work that we were proposing to do. That remit, as I say, was clear. It was limited to two particular systems. The Cabinet Office agreed with our proposed work programme. They raised some issues that they would like us to look into a bit further—predominantly the cash flow issues—and that filtered into the work programme and the work that we did and subsequently in the report that we produced for the Cabinet Office, again, highlighting cash flow and reserves as the key financial risk.
Q312 Chair: Could I just briefly ask who briefed you at the Cabinet Office?
Alastair Duke: There were two main contacts at the Cabinet Office, two policy advisers, one being I think the interim head of the youth programme at the time. Throughout the whole exercise those were our two key contacts.
Q313 Chair: Did you have any contact with Ministers?
Alastair Duke: No.
Q314 Chair: Or special advisers?
Alastair Duke: No, not that I am aware of.
Q315 Paul Flynn: The tender documents said that the successful bidder would assess the effectiveness of the charity’s governance and control. However, your written evidence stated that assessing the effectiveness in these policies and procedures was outside the scope of review. Did you change the instructions you had in the bidding document?
Alastair Duke: What we agreed in terms of the programme of work that we would conduct was that we would benchmark the governance systems and the financial controls against best practice. So, in terms of the financial controls, we benchmarked that against the Charity Commission guidance on internal financial controls and, in terms of governance, we benchmarked that against the good-governance code for the voluntary and community sector and also against the Charity Commission’s guidance in terms of the hallmark of effective—
Q316 Paul Flynn: How would this assess the effectiveness of the charity’s governance and control?
Alastair Duke: Well, what we were tasked with doing was to report against best practice, but what must be made clear is that good financial controls and good governance controls will not necessarily result in the correct decisions being made.
Q317 Paul Flynn: You use the word “restricted” in your opening remarks. In what way did the scope of the review change from what was outlined in the document on which you bid on the internal controls? The evidence seems to be that there were serious problems there. Did you spot them?
Alastair Duke: The work that we conducted was to look at the internal controls, and that is a matter of looking at processes and systems and looking at the controls inherent within those systems. We did that; comparing them to other charities’ best practice, the controls, as one would expect for a charity the size of Kids Company, were appropriate. As I say, good controls can be overridden. They do not always work. But in the work that we did, certainly the controls that were in place were considered appropriate, subject to the recommendations of course that we have raised in our report.
Q318 Paul Flynn: To cut through the management speak, how effective do you think your judgment was on the work of the Kids Company?
Alastair Duke: We concluded that the governance controls and the financial controls were appropriate. That does not give complete assurance that financial decisions will be correct, or that the controls may not be overridden but, on the basis of the work that we conducted and the evidence that we reviewed, gathered and analysed, in our professional opinion the controls were appropriate.
Q319 Paul Flynn: What is the difference between assessing whether policies and procedures were appropriate for a charity of similar size and complexity as the Kids Company, which you said you did do, and assessing the effectiveness of these policies and procedures? How do you do this and look at their procedures without including an assessment of the outcomes?
Alastair Duke: The decision-making processes were not within the remit that was agreed with the Cabinet Office.
Q320 Paul Flynn: But you did not do that. You did not assess the effectiveness of the outcomes of these policies and procedures. All you did was you ran through and said, “This is the same thing as many other bodies are doing” without coming to any worthwhile conclusion about whether the outcomes were worthwhile.
Alastair Duke: As I say, we were looking at the processes and controls. We did not look at a list of detailed transactions. We concluded on the work, which was supported by evidence, and we have reported our findings.
Q321 Paul Flynn: You appear to have changed your work from the original bid advertised to do something that was really worthwhile and would have given us the information to assess whether what Kids Company was doing was valuable, to a managerial romp through the books to say, “Well, the procedures they are using are similar to those of other companies”, which tells us nothing.
Alastair Duke: We worked throughout the planning stage with the Cabinet Office explaining the work that we were going to do. We agreed the work programme in advance of contacting the Kids Company and, yes, we agreed what was going to be done and that is what we did.
Q322 Paul Flynn: We are coming to the conclusion in this Committee, having a mountain of evidence on this, that there were very serious problems with Kids Company, but your report, which cost, what?
Alastair Duke: The fee that we charged was £12,000.
Q323 Paul Flynn: It turned out to be something which is of nil value to us as a Committee. You just did an accountant’s look through it, which often we are told—and it is in this report—that very clever people have moved in, auditors have moved in, and found everything to be okay, when they have missed something that was at the core of the work of the organisation that was very wrong indeed, which it certainly was with Kids Company. But you did your assessment. You collected £12,000 and said, “Everything is fine and dandy” and the Kids Company continued to do the damage that we believe they probably did do.
Alastair Duke: We produced our report based on evidence. We have highlighted on the first page and the last page, and 29 times throughout, that cash flow was the main financial risk to the organisation.
Q324 Paul Flynn: A final question on this point: of what value was your report to people like us?
Alastair Duke: The report was produced in line with the agreed remit. How the report was used subsequently by the Cabinet Office is not something I can answer. We based it on best practice. We found that the systems and controls were in line with best practice, subject to the recommendations, but we highlighted the key issue as being cash flow. There was no pot of cash available for a rainy day.
Q325 Chair: How often each year did the trustees meet formally?
Alastair Duke: I would have to check. In my report I think I referred to it: between eight and nine times a year.
Q326 Chair: How many of the trustees did you personally meet?
Alastair Duke: I met three trustees. I met the vice chair, the chair of the finance committee and the chair of the governance committee.
Q327 Chair: How did you assess the strength of their governance?
Alastair Duke: As I have mentioned, we reviewed the governance procedures against best practice. I held discussions with the trustees to further investigate and I obtained five files of evidence.
Q328 Chair: How accurate do you think your assessment was?
Alastair Duke: In terms of the governance systems, we were—
Chair: But governance is not about systems. It is about judgment, isn’t it?
Alastair Duke: The governance systems are a matter of generating information and providing information.
Q329 Chair: How did you assess the relationship between the trustees and Camila Batmanghelidjh?
Alastair Duke: I met with the trustees. I met with three trustees and I met with the chief executive and, as part of those discussions, we did investigate the relationship, the flow of information, the support that was provided by one group to the chief executive and the senior management team.
Q330 Chair: But how accurate was this assessment, now that we know that the governance was not very good?
Alastair Duke: As I say, governance systems provide information—
Chair: You keep talking about systems. Anybody can run systems. What is governance? What is good governance? Is it just a system?
Alastair Duke: Well, we were asked to look at the governance systems and—
Q331 Chair: No, you weren’t. You were asked to look at the governance. If I remember correctly, you were asked to look at the effectiveness of the charity’s governance and controls.
Alastair Duke: Further on within the remit you will see that we were to look specifically at some of the financial information provided in terms of governance.
Q332 Chair: But you did not assess the governance, did you?
Alastair Duke: We looked at the information—
Chair: Or if you did you got it very wrong, didn’t you?
Alastair Duke: We assessed the information that was provided and we came to the conclusion that the governance systems were appropriate.
Q333 Chair: So you give yourself a tick?
Alastair Duke: Based on the information, yes.
Chair: And then the charity goes bust.
Alastair Duke: We highlighted that cash flow risk and reserves were the main issue for the charity.
Q334 Chair: You think the trustees had a really good grip of it, they really understood it and they were a brilliant example of how a charity should be run?
Alastair Duke: Ultimately, the trustees have the responsibility for all decisions. The trustees were aware of the cash flow risk.
Chair: So you really thought they knew what they were doing?
Alastair Duke: We were not looking at the decisions taken by the trustees.
Q335 Chair: Oh, right, isn’t governance about what decisions are taken?
Alastair Duke: We were looking at the flow of information to the trustees. We were not asked to look at the decisions taken by the trustees and to analyse and comment—
Q336 Chair: So you can assess the governance of a company or a charity without making a judgment about the quality of their decision-making?
Alastair Duke: The remit was clear that—
Chair: So it is all in the remit, is it? Can you understand why we are a bit disappointed?
Q337 Tom Tugendhat: It is a bit like trying to analyse a racing car team without looking at the quality of the driver. It strikes me as an absurd thing to do, to say that the system works but, sadly, the driver is drunk. It is bonkers, isn’t it?
Alastair Duke: I keep coming back—and I am sorry I keep coming back—to the fact that we were looking at the systems. We were not looking at the decisions.
Q338 Mr David Jones: Perhaps I am confused. You said that, so far as you were concerned, the governance of this charity was appropriate. That was the word that you used. Yet you told us in your written evidence that the effectiveness of these policies was outside the scope of your review. How could you make an assessment as to whether or not it was appropriate if in fact the effectiveness was outside the scope of your review?
Alastair Duke: Our assessment was based on the work that we conducted. As I said, we looked at the evidence, we did not look at the effectiveness, and our conclusions are based on the evidence that we found.
Q339 Mr David Jones: In that case, how could you decide that it was appropriate? Appropriate, as far as I can see, means pretty much the same as effective.
Alastair Duke: We were reporting to the Cabinet Office against what they had asked us to do.
Q340 Mr David Jones: Who signed off the contract for your company at the Cabinet Office?
Alastair Duke: From the Cabinet Office?
Mr David Jones: Yes.
Alastair Duke: I cannot recall. I can find out.
Q341 Mr David Jones: Do you know if there was any ministerial input into that contract?
Alastair Duke: I don’t know. That is a question for the Cabinet Office.
Mr David Jones: But you do not know?
Alastair Duke: No, I don’t know.
Q342 Mrs Cheryl Gillan: First of all, I wish to declare an interest. I used to be a consultant to PKF some time ago.
I was concerned about: you have been a partner in PKF Littlejohn now for three years and you have considerable experience of the charitable sector. I want to know, when you looked at Kids Company and the practices that you reported on, how those compared to other charities of a similar size that PKF has looked at.
Alastair Duke: As a firm, we undertake many similar assignments to this, looking from smaller charities to some of the largest charities in the UK and Europe. Personally, I have undertaken between 40 and 50 similar assignments. We have a wide breadth of experience to draw upon and the conclusions we reached, based on our experience and best practice, was that the financial controls that were in place were appropriate. It is what we would expect to see in an organisation like Kids Company.
Q343 Mrs Cheryl Gillan: There was nothing that ran a flag up the flagpole that it was the Cabinet Office that was recruiting you to do this piece of work? Nothing made you feel that this needed to be looked at in great detail and with precision?
Alastair Duke: No, the remit that was set by the Cabinet Office is something that we see other funders doing, so there was nothing that would suggest that there was anything we ought to be alerted to early on.
Q344 Mrs Cheryl Gillan: Did the officials who recruited you when you won the tender not impart to you any suspicions about the way in which this charity was being run or any of its governance and controls? It was normal practice to have this type of piece of work done by the Cabinet Office?
Alastair Duke: They didn’t release anything about what they do with other charities or anything like that. I do not know. There were some concerns that they asked us to look into, which were mainly related to cash flow and cash flow management, which we did.
Q345 Mrs Cheryl Gillan: They did raise concerns with you from the Cabinet Office that there was something that they thought needed close examination?
Alastair Duke: Certainly in the planning meeting that we had with the Cabinet Office in early January 2014, yes, like any planning meeting, there was a dialogue about what it was they wanted us to do, what we could do and what they wanted us to—
Q346 Mrs Cheryl Gillan: So they did share serious concerns with you about it?
Alastair Duke: I don’t know if you could call them serious concerns but, certainly, they referred to indications of cash flow risks and cash flow issues that they wanted us to investigate a little bit further.
Q347 Mrs Cheryl Gillan: Did you pitch the price low to win this contract?
Alastair Duke: The price that we quoted was discounted because that is what we do in the charity sector, but it was a price we were comfortable with and irrespective of the price, the work was carried out professionally and it was carried out to what we were expected to do; I am very proud of what we produced.
Q348 Gerald Jones: You may have answered some of this question, but I want to explore it a little further. We talked about cash flow and management accounting, but could you say how far the issues that you identified undermine the ability of Kids Company to financially plan their finances in an appropriate way?
Alastair Duke: We looked at the systems and processes at the time of our visit and highlighted some areas of improvement; where cash flow forecasting and management of cash could be improved. We made a number of recommendations to undertake better reporting and provide better information to the finance committee and the trustees. For example, rolling 12-month cash flow forecasts would enable the trustees to see where there are pinch points and take the necessary corrective actions to deal with that.
Q349 Gerald Jones: What did Kids Company say to you in relation to your advice?
Alastair Duke: Once we had provided the report, they responded with their comments against our recommendations. We were not tasked with following up whether those recommendations had been implemented. That is not something I can provide any confirmation of but, certainly, in the process of discussing recommendations they have agreed with what we found.
Q350 Mr Andrew Turner: Why might we have been advised that there were two versions of the report?
Alastair Duke: The process in any assignment like this is that there is only one version of the report. The draft report went in the first instance to the Kids Company to review the detail to make sure there were no errors of fact or interpretation. That resulted in a few changes in terms of style, nothing of substance. Once the report had the charity’s responses in it, it went to the Cabinet Office, again, to review the content and ask for any clarification, but throughout there was only ever one report that was produced.
Q351 Mr Andrew Turner: At various stages different things were written in what turned out to be the final report.
Alastair Duke: I had editorial control over the report throughout and, as the process of clarification with Kids Company or with the Cabinet Office, yes, there were minor amendments. Nothing of substance changed from the draft one to the final draft that I signed.
Q352 Mr Andrew Turner: Your written evidence indicates that, after receiving comments from the Cabinet Office, PKF Littlejohn amended the report to emphasise that unless cash flow improved, “it would not be possible for the charity to build reserves and invest in new activities and locations”. Why did you not make these comments in the first draft?
Alastair Duke: The very first draft of the report had that exact comment on the very last page, where it still is. In our discussions with the Cabinet Office I agreed, and I thought it was a good idea, to bring that upfront to the very first page, so that quote is my quote from the very first draft; it is just a matter of replicating it at the front. We have not been asked to include anything else.
Q353 Mr Andrew Turner: Sorry, explain a bit for my benefit, making this clear. You are saying that the same words were in the report at the beginning as at the end, so this quotation is wrong.
Alastair Duke: The quotation that we have referred to in our written evidence is what was included in the first draft of the report on the very last page, but through the process of reviewing the report it was agreed with the Cabinet Office that it would be useful to draw it to the front because, again, it was the main issue.
Q354 Mr Andrew Turner: It was the main issue, wasn’t it?
Alastair Duke: Yes, yes.
Mr Andrew Turner: Why did you not include it at the beginning the first time?
Alastair Duke: In the very first draft that was sent to the Cabinet Office, the executive summary had not been drafted yet, so there was no opportunity to put it in there. As we went through the process of redrafting, yes, it was felt that it was a good way of summarising the key issue to the Kids Company.
Q355 Mr Andrew Turner: Why was it the Cabinet Office that had to emphasise the implications of the lack of cash flow?
Alastair Duke: The Cabinet Office did not have to emphasise the implications. As I said, the implications of the cash flow are mentioned 29 times in the report. Throughout our recommendations there is a common theme of cash flow and improving the cash flow management, so all we have done is highlight something that was quite critical at the end just to make sure it was not lost in the detail.
Q356 Mr Andrew Turner: Is this the way most companies of your type produce reports?
Alastair Duke: Sorry, in terms of—
Mr Andrew Turner: In terms of the emphasis on certain quotations that are more important at the beginning than they are at the end?
Alastair Duke: I think we had identified the key issue. It was just simply a matter of bringing it in. It was just a fair point and I was quite happy to make that amendment and bring that in.
Q357 Mr Andrew Turner: They would not have had to move it if the information had been there at the beginning.
Alastair Duke: As I say, at the very start of the process the executive summary had not been drafted. All our findings and all our recommendations were in there and that was a common theme throughout.
Q358 Oliver Dowden: Kids Company was required to report to the Cabinet Office what costs it had incurred in delivering the programme of work that the Cabinet Office was funding. In your report you noted that the Kids Company was claiming for accommodation costs totalling over £420,000 for the year. However, you noted that the accommodation was a gift in kind and that Kids Company was not actually incurring any expense for this, so how true do you think it is that that constitutes an overcharging of Government by Kids Company?
Alastair Duke: The reason why we highlighted that in our report is that the agreement with I think the DfE, was that the report to the DfE was on costs incurred and, as you refer to, gifts in kind are not costs that have been incurred so we have highlighted in our report that that cost should be removed from the calculation submitted.
Q359 Oliver Dowden: Do you accept that that did amount to an overcharging, given that they did not actually incur that cost, but they were still billing it as an expense for Government?
Alastair Duke: I would have to look at it again because there are some other points that we have raised in our report regarding how the reporting to the Cabinet Office was formalised and how the numbers were generated. You will see elsewhere that there is some generalised expenditure used in the reporting. So, yes, we have highlighted that gifts in kind should not have been included in the claim, but whether that would have had an impact on the claim overall I cannot comment on.
Oliver Dowden: Okay, but you will write to us on that point then?
Alastair Duke: Yes, I can provide a better explanation.
Q360 Chair: If you found that happening in a company that was affecting the tax payment of a company, would that not be fraud?
Alastair Duke: I work with charities. The nature of the claim, as I say, depends on the funding arrangement and as I mentioned I will have to look at it—
Q361 Chair: How honest and straightforward was the presentation of those accommodation costs?
Alastair Duke: The accommodation costs were not in line with the grant agreement, in that they were not costs that had been incurred—
Chair: But how honest was it?
Alastair Duke: That is something that you will have to ask the preparer of the return. I don’t know whether it was an oversight; whether they understood it.
Q362 Chair: But don’t accountants—I know this was not an audit—do a true and honest picture of the company? I can’t remember the exact words that you put at the end of an audit. How fair, accurate and honest was it for them to do this, and did that not raise an eyebrow in your firm about how things were being conducted and what the governance of this charity was like?
Alastair Duke: We undertook the review. We identified this as an issue and we have reported it.
Q363 Oliver Dowden: Given the sum involved—£500,000—that the charity was claiming that it had incurred as expenditure, when it had not actually incurred it, did that not at least strike you as being highly irregular?
Alastair Duke: As I say, I would have to look at the implications for the overall methodology, I suppose, behind the claim. I could not possibly say how that impacted on the claim.
Q364 Oliver Dowden: I suppose the question is not so much how it impacts everything else, it is just the fact that they are claiming that they have incurred this expenditure and they have not actually incurred this expenditure. It surely does reflect in some way on the governance of the charity that they claim such a large amount when that cost did not essentially exist.
Alastair Duke: As I say, we have identified that and we have reported it. I would expect and assume that subsequent to that reporting—
Q365 Chair: It did not indicate anything wrong with the governance?
Alastair Duke: This is a process of looking at financial controls—
Chair: The answer is, no, it did not indicate to you anything wrong with the governance?
Alastair Duke: This was a matter of financial controls and identification of restricted and unrestricted costs.
Chair: Well, that is your view.
Q366 Tom Tugendhat: The review recommended that the charity produce an analysis of restricted and unrestricted bank balances to establish the level of unrestricted expenditure met from restricted fund cash. How usual or acceptable is it for an organisation to use restricted fund cash to meet unrestricted expenditure?
Alastair Duke: From my personal experience with clients, it can happen, and what we would expect is that, where restricted cash is used, it is replenished as soon as possible so that cash held for a specific purpose is available to meet that purpose and meet the restrictions that have been placed by a donor.
Q367 Tom Tugendhat: Is there any evidence at all that Kids Company did that?
Alastair Duke: From the work that we conducted, looking at cash balances during the year, there were indications that restricted cash had been used at times to fund unrestricted expenditure.
Q368 Tom Tugendhat: But the replenishment had not happened?
Alastair Duke: At various times, the replenishment did happen as cash came in through donations and so on.
Q369 Tom Tugendhat: So Kids Company’s behaviour on this was perfectly normal?
Alastair Duke: Not uncommon. As I say, the vast majority of clients I have worked with have always maintained the two levels as they should be, but there have been times and there are times when restricted cash can be used for short-term unrestricted costs and then replenished.
Q370 Tom Tugendhat: Your report includes Kids Company’s response to your recommendations. Most of these are recorded as having been adopted. How did you monitor whether these changes were actually introduced?
Alastair Duke: We were not asked to monitor whether those had been introduced or not, so once we had completed our findings that was the end of our involvement.
Q371 Tom Tugendhat: You signed off a governance system with recommendations without knowing whether or not the governance system would include the recommendations and, therefore, without knowing whether the sign-off was actually valid?
Alastair Duke: We have highlighted that we haven’t followed up and we were not asked to follow up on the implementation of our recommendation.
Q372 Tom Tugendhat: Forgive me, I may not be understanding here. You have told us already this morning that the governance systems were adequate. Correct?
Alastair Duke: Yes. They were adequate, yes.
Q373 Tom Tugendhat: You also told us just now that you made some recommendations. Correct? That is correct, is it, you made some recommendations?
Alastair Duke: Yes, there were 19 recommendations.
Q374 Tom Tugendhat: The recommendations presumably needed to be followed up for the governance system to be fully adequate?
Alastair Duke: The recommendations that we made were to improve the information, the systems and controls, and—
Q375 Tom Tugendhat: To improve; so if they did not do these recommendations the governance was still adequate?
Alastair Duke: We were there to provide an opinion. The governance systems were not inappropriate, but we highlighted cash flow as being the key risk and the recommendation—
Q376 Tom Tugendhat: Forgive me, I must be thick, but I do not really understand what you are saying. Were these recommendations essential to make the governance system appropriate or not?
Alastair Duke: They were there to improve the governance systems.
Q377 Tom Tugendhat: So without your recommendations the governance systems were still absolutely fine—no problem at all?
Alastair Duke: I don’t think you can say that there were no problems at all because we have said that they were appropriate, but, like every organisation, there can always be improvements and those recommendations are the improvements that we—
Q378 Tom Tugendhat: I see. So the recommendations were minor?
Alastair Duke: They were there to improve. I would not like to try to—
Chair: Moving on, David Jones.
Q379 Mr David Jones: We heard from Alan Yentob that your firm would be using Kids Company as a case study in a presentation the following week. Is that right?
Alastair Duke: I did not use Kids Company as a case study in the following week or since this exercise.
Q380 Mr David Jones: So what Mr Yentob told this Committee was wrong?
Alastair Duke: I have never had a conversation with Mr Yentob and I do not recognise that comment.
Q381 Mr David Jones: There was no presentation?
Alastair Duke: There was a presentation, but it was on a subject completely different to this and we did not use and have not used Kids Company as a case study
Q382 Tom Tugendhat: Where did he get this idea from?
Alastair Duke: That is a question to ask him.
Q383 Chair: Given you decided the governance was appropriate, why wouldn’t you use it as a case study?
Alastair Duke: As a firm occasionally we use case studies in presentations, but I have not given a presentation where it would be appropriate to use Kids Company.
Q384 Chair: But you could have used it as a case study?
Alastair Duke: There are certain elements of what Kids Company did—as I say, we benchmarked it against best practice—where we could draw on some of the—
Q385 Chair: Given what we know now, what do you think you missed that was relevant that the Cabinet Office should have been told by your report?
Alastair Duke: We reported our findings based on the work that we conducted at—
Q386 Chair: Back we go into this little closed, convenient, syntactical loop, which is protecting your firm but actually not providing much value to the taxpayer.
Alastair Duke: Our report was for the Cabinet Office. We highlighted everything we found, everything that should be in there—
Q387 Chair: Do you think your firm was under any political pressure—
Alastair Duke: No.
Chair: —to help the Government. How aware were you that Ministers wanted to carry on supporting Kids Company?
Alastair Duke: We are staunchly independent. We are not pressurised by anyone, I did not feel any pressure and our report was based on the facts that we found.
Q388 Chair: Given that the report was used to justify handing over more taxpayers’ money, how comfortable are you with that now?
Alastair Duke: How the Cabinet Office chose to use our report is something you would have to—
Q389 Chair: It is not your responsibility?
Alastair Duke: We conducted the work that we were asked to do and produced the report that followed on from our work.
Q390 Chair: You do not think there is any reputational damage from the fact that you are associated with signing off the governance and financial controls of a charity that has now subsequently been found to have very poor governance?
Alastair Duke: We conducted our work. We highlighted the key risk as being cash flow in that.
Q391 Chair: What is the point of paying for reports like yours if they do not uncover what people actually need to know?
Alastair Duke: Our work was not a forensic investigation.
Q392 Chair: So you are blaming the Cabinet Office for asking the wrong questions or for failing to ask the right questions?
Alastair Duke: I am just saying we carried out what we were asked to do.
Q393 Chair: Can you understand why we are a bit disappointed?
Alastair Duke: The work that we conducted was carried out to a very high standard. We have reported on our findings and I stand by the findings that we have included in our report.
Q394 Chair: So have you learned any lessons from this episode for the future about how you take on work of this nature for Government that might be more useful for the Government in the future?
Alastair Duke: I think everyone can learn lessons.
Chair: So what are those lessons?
Alastair Duke: I think certainly the one thing that I would take away is just making sure that there is a clear understanding of the work from the outset. As far as I am concerned this was carried out to—
Q395 Chair: What was lacking in the understanding between you and the Cabinet Office, do you think?
Alastair Duke: The Cabinet Office and ourselves set out and prepared the scope of the work, both parties, and as far as I am concerned, everyone was aware of what was—
Q396 Chair: It does sound as if you were conducting this review with your eyes wide shut, and you were only going in to look for what you had been particularly instructed to find. You were not looking out for hazard and risk, which is obviously why the Cabinet Office commissioned the report in the first place.
Alastair Duke: The Cabinet Office was aware of the work that we were going to conduct. It agreed with the programme, how we were going to conduct it, what we were going to look at, and we fed back the findings from that work.
Q397 Tom Tugendhat: Is there any chance that there has been just the slightest misunderstanding between you and the Cabinet Office, so that when they said “governance” they meant, “Is the charity being run in a fit and proper way?”, and you heard, “Is the plumbing working?” Do you not think that is quite an important distinction?
Alastair Duke: We set out to the Cabinet Office in our tender and at the planning meeting exactly what we were going to do.
Q398 Mrs Cheryl Gillan: Did you get the impression that the officials commissioning this work were familiar with the way in which charities operate?
Alastair Duke: As I said, the two individuals from the Cabinet Office, from my understanding and the discussions we had, were aware of charities and had a background of working with charities.
Q399 Mrs Cheryl Gillan: So you would say that as commissioners, they knew what they were talking about when they commissioned the work from you?
Alastair Duke: I believe so, yes.
Q400 Paul Flynn: It appears that you have put your blinkers on, you have concentrated on only a tiny area, you went into an organisation that was full of chicanery—all kinds of things were going on, misuse of large amounts of public funds, possible fraud going on everywhere—and you went through this and came out with a report that gave them a clean bill of health. What value do you think you would have in future? Do you think anyone will employ you in future to do a similar report when you go in there and give a clean bill of health to a body that was deeply in trouble and eventually went broke?
Alastair Duke: We did not say there was a clean bill of health. We highlighted the cash flow. You say the company went bust. We have highlighted the cash flow risk as being the key risk, and the lack of reserves, that lack of a pot of cash for a rainy day.
Q401 Chair: The misuse of this report as a basis to hand public money to this charity—
Alastair Duke: How the Cabinet Office used—
Chair: The same answer that we got from PWC. A bit disappointing. You are meant to be advisers. You are meant to give advice, but anyway.
Q402 Paul Flynn: Is there any sign of humility or penitence from you to say that you got it wrong? You missed out a huge amount of what was happening and you were trusted and you were prayed in aid by these companies to justify their continuing looting of the public purse of millions.
Alastair Duke: We—
Tom Tugendhat: “Apart from that incident, how was the play, Mrs Lincoln?”
Chair: Do you have anything else you wish to add?
Alastair Duke: Nothing at this time.
Chair: Thank you very much.
Examination of Witness
Witness: Nick Brooks, Partner, Kingston Smith, gave evidence.
Q403 Chair: We move on to our third witness. Please could you identify yourself for the record?
Nick Brooks: I work in the not for profit area at Kingston Smith and I am the audit partner of Kids Company.
Chair: Thank you. Again, we will try to keep our questions short and if you would keep your answers short as well that would be very helpful.
Q404 Mr David Jones: Mr Brooks, both the Cabinet Office and the Charity Commission have said that they were reassured by the clear audits of Kids Company. Were they entitled to be reassured?
Nick Brooks: Yes, I believe they were, on the basis of the audit.
Q405 Mr David Jones: Even in retrospect, is that still your view?
Nick Brooks: Hindsight is a wonderful thing, and of course some of the points that have been raised are subsequent to the end of our audit. The last audit we did was 31 December 2013 and many of these points that have been raised today and in the press were during the years 2014 and 2015.
Q406 Mr David Jones: Yes, but we have seen over quite a few years that Kids Company had problems, for example, with its reserves. Do you think that is something that the Cabinet Office, the Charity Commission, should have been concerned about?
Nick Brooks: Yes, I think they should have been and it was clearly stated in the accounts that there was an issue with the reserves. Note 23 for the accounts clearly states that there is an issue there, and the accounts need to be read in the whole.
Q407 Mr David Jones: So that is a matter surely that would not give reassurance, in fact quite the reverse. It would ring alarm bells.
Nick Brooks: It rather depends on how you read the accounts. The accounts clearly state the issues, and you have to read the accounts from the beginning to the end to get the full picture of a company or charity’s financial position. You cannot just delve in and look at one bit of it.
Q408 Mr David Jones: You have just told me that taken overall those accounts were reassuring and should have been regarded as reassuring both to the Commission and to the Cabinet Office.
Nick Brooks: I think they were reassured by it. I think the question was about whether they were reassured by it. Whether it was right to be reassured by it is a different matter. I do not think it is news to the Charity Commission or anyone in Government that there were financial restraints. They were close to the wire and had been for a long time. I think everybody knew that and I think part of the Government funding was in fact to ensure that the charity survived.
Q409 Mr David Jones: This was not something that you felt appropriate to flag up with red lines around it?
Nick Brooks: We raised it in our management letter. Our report of course, our statutory audit report is to the members of the charity, who are the trustees. We would expect that report to be a public document and we expect everybody to be aware of what it says. However, you cannot just read the audit report in isolation. It is just one page of many pages of accounts and to get the full picture of the accounts one would have to read the whole lot.
Q410 Mr David Jones: In the course of your involvement with the Kids Company as auditor how far did you examine whether the company was spending according to its charitable purposes?
Nick Brooks: We checked and looked at samples. An audit is only looking at samples. We do not do the detailed in-depth reviews that the two previous firms have looked at; they look at it much closer. We have to by nature look at a sample across the whole of the 12 months, and we pick those samples and we look at them to see whether the objects of the charity are being followed.
Q411 Mr David Jones: You were satisfied?
Nick Brooks: It is fair to say that this is an unorthodox charity and in the words of the Cabinet Office, “controversial”. I think everybody knew it was unorthodox and controversial and my impression is that that was the attraction to both funders and also to the Government. They wished to wheel that out for the rest of the country. We were expecting, and we found, that there were unorthodox payments, but we queried those.
Q412 Mr David Jones: When you talk about unorthodox payments, did you find, for example, large sums of money being paid for clothing?
Nick Brooks: Not large sums of money, but certainly monies were spent on clothing and in the trustee’s annual report it clearly states that money was spent on clothing and other aspects, like toiletries, furniture and fittings and that sort of thing.
Q413 Mr David Jones: School fees?
Nick Brooks: I do not recall ever seeing school fees in the sample that we took.
Q414 Mr David Jones: There were large sums of money paid for school fees.
Nick Brooks: Not in the sample that we looked at.
Q415 Mr David Jones: You said it was an unorthodox charity, but nevertheless it was a charity and it should have behaved like a charity. It was constrained by charity law. Was there nothing in the pattern of expenditure that you saw that caused you concern that it was not spending money in the way that you would expect of a charity, whether or not it is an unorthodox charity?
Nick Brooks: To a degree, the assessments are done by the case workers and the work that we look at is very much around the financial controls. So if someone says that in fact that ought to be paid, provided it is not completely off the wall, we would just check that it has been properly authorised and correctly treated through the system.
Q416 Mr David Jones: So again you are looking at systems and controls rather than the sums of money and the purposes for which they are paid?
Nick Brooks: I can give you an example. There was one thing I queried when I reviewed the file. There was some money paid for a boxing course, which is quite unusual. I do not think I have any other charities that pay for boxing courses. The response was that this was for an individual who had some issues and that the case worker, the therapist, felt that a boxing course would help them. As I say, it was an unorthodox charity, therefore I do not think it was up to us as auditors to query whether the therapist was wrong. I think that comes down to the overall management of the organisation, the governance and how it is run.
Q417 Mr David Jones: Indeed, and you are the auditor of the company. Again in terms of governance, you keep mentioning of course that it is an unorthodox charity, but what I keep mentioning is that nevertheless it has to expend money in a proper way as a charity. You had no alarm bells ringing at all during the time that your firm was auditing the books of this company?
Nick Brooks: If we found any peculiarities then we queried them with the management and sought what we felt were reasonable representations from them as to why this money was spent. As I say, it goes back to the fact that if a therapist or one of the case workers felt that that money should be spent on that individual, it is very difficult for us as auditors to say, “We don’t believe that is right”.
Q418 Mr David Jones: You were always wholly satisfied with the explanations that were given to you?
Nick Brooks: Yes.
Mr David Jones: On each occasion?
Nick Brooks: Yes, on our samples we were satisfied with them.
Q419 Paul Flynn: How influenced were you in your work by the fact that Kids Company had unique patronage, from the Prime Minister, from Prince Charles, and from Coldplay?
Nick Brooks: None whatsoever.
Q420 Paul Flynn: It does suggest that the charity was rather special. It was part of the Government’s starting to farm out public services to private bodies in the belief that they could run them more cheaply. You were not aware of that? Do you live in some cocoon in some way?
Nick Brooks: It did not cross my mind at all.
Q421 Paul Flynn: Your management letter stated, “No significant deficiencies in internal control had been identified”. Do you still stick to that?
Nick Brooks: In the years that we were doing the audit we felt that was the case.
Q422 Paul Flynn: Did you ever visit Kids Company, say, on a Friday?
Nick Brooks: Yes.
Q423 Paul Flynn: Did you see the queues of young people turning up to collect their envelopes?
Nick Brooks: We did. We sent out teams to both Bristol and London to monitor that and see that they were handed out and that they were being correctly signed for.
Q424 Paul Flynn: What were the sums in the envelopes?
Nick Brooks: I cannot tell you.
Q425 Paul Flynn: We were told that it was routinely between £10 and £200 with one person saying they witnessed the handover of £1,000. This is in cash. Does it strike you as normal for a charity?
Nick Brooks: Most charities, as I say, do not necessarily do it that way. That is the way they run it and that is the way that the case workers decided they needed to pay. It was not only money of course—it was vouchers as well that they received for Tesco and the local newsagent stores for food.
Q426 Paul Flynn: We are told the area is one where there is a lot of drug use. If you give a drug addict a large amount of money, what do you think he would do with it?
Nick Brooks: Well, phrased that way the answer is fairly obvious. We were not there to assess whether the case workers were correct in their assessment of how they needed to deal with these kids.
Q427 Paul Flynn: Did you go to Kids Company’s headquarters on a Monday and notice that there were virtually no children there?
Nick Brooks: No. I mean, the answer is I am not sure I have visited them on a Monday, but I would not have noticed whether they were there or not, I do not think. When I have ever visited them there at their head office there were no children queuing up at all. I thought the children mainly queued up at their centres.
Q428 Paul Flynn: The previous auditors, MacIntyre Hudson, outlined the key audit risks and devised appropriate audit programmes in line with these. They pointed out that there was a risk that cash allowances were not properly distributed or documented. You found that they were. Was that your conclusion?
Nick Brooks: Our conclusion was that they were properly distributed to the persons who were supposed to get those.
Q429 Paul Flynn: What did you identify as the audit risk for the charity and how did you assess them?
Nick Brooks: In that particular area, the audit risks were misappropriation, money being given to the wrong individuals, those individuals not existing or money being given to people in the management team, so we checked that. On a number of occasions, we went to a number of centres and we checked that the monies were paid out to individuals, either the children themselves, their guardians or their parents and that they were signed for.
Q430 Paul Flynn: You have possibly seen evidence to this Committee suggesting that money was wasted on a gargantuan scale by the charity, which was ludicrously extravagant in the sums of money they were giving out. Some of these sums we have had quoted—a £300 pair of shoes, and various other charges and expenses that they had. It is beyond what any reasonable charity would provide. Are you not concerned about this?
Nick Brooks: Unfortunately, the samples that we took during our audit did not highlight that. They have only come out subsequently since they have been in depth—the difference between an external audit and an internal audit. The last two reports really have been much more of an internal audit nature, where you look in much more detail at a lot more invoices. There were thousands of documents and we can only test a sample.
Q431 Paul Flynn: How do you choose your sample?
Nick Brooks: Statistically.
Paul Flynn: Explain.
Nick Brooks: It is done by a computer.
Q432 Paul Flynn: This is a random sample, is it?
Nick Brooks: Yes a random sample.
Q433 Paul Flynn: Is this reliable?
Nick Brooks: Yes, I believe so. I believe all other firms use that system.
Q434 Paul Flynn: Would you not be better to choose those items that look to be extravagant; that seem to be off the scale? You said unless something was off the wall you would not bother. What if it was half way off the wall? Would you bother?
Nick Brooks: Yes, I think I did. I think I used the example of the boxing course. I thought that was slightly strange, therefore that is why we queried it. There were a lot of therapy treatments that were paid for, which the case workers had authorised were correct for those individuals.
Q435 Paul Flynn: Where were the therapies located, in the main?
Nick Brooks: They employed a lot of therapists themselves. Some of them were probably self-employed I believe, from memory.
Q436 Paul Flynn: Were some in Harley Street?
Nick Brooks: They might have been. I am afraid I do not have that information to mind.
Q437 Paul Flynn: You would not have made any assessment of whether these were voodoo therapists who were barely qualified?
Nick Brooks: I do not think I would be in a position to make that assessment.
Q438 Paul Flynn: What is your feeling now, looking back on the chaos and extravagance of the Kids Company, which is obvious to everyone now and certainly clear to most members of this Committee, that you have missed all this? You went through it, you did your audit, gave it a clean bill of health, picked up your fee and they still carried on in what was I believe not far off a confidence trick and the misuse of public money? Is that your judgment now? How did you miss all this?
Nick Brooks: In hindsight it is all—
Paul Flynn: There were people with foresight who suggested this.
Chair: Let him answer.
Nick Brooks: In hindsight I would be listening to what has been said here. The report from PwC was a very short report and there have been no responses from management in respect to the representations from either the management or the trustees as to these expenses. I have not seen that report, therefore I cannot comment on that report.
In terms of our work, I am confident that it will pass muster. The audit we did for Kids Company is no different from what any other firm of auditors would do or from any other audits that we do. If we pick up areas that we feel are incorrect or we do not believe follow charitable objects then we query them and we seek answers from the management as to whether they are correct. If we felt they weren’t correct, we would either challenge the management or report to the trustees.
Q439 Paul Flynn: Are you predisposed to give favourable reports in order to play the tune that the piper is calling?
Nick Brooks: Not at all.
Q440 Paul Flynn: What percentage of your reports are adverse or give a clean bill of health? One in 10, one in 20?
Nick Brooks: Less than that, I would think.
Paul Flynn: Less than one in 10?
Nick Brooks: Yes, I do not have that figure, I am afraid, because we are a fairly large firm and I only look at my portfolio.
Q441 Paul Flynn: We will pin you down to this. Is it one in 20, one in 30?
Nick Brooks: Possibly, yes. It might be even more than that.
Q442 Paul Flynn: Do you think that is a fair reflection on the abuses that take place within the sector?
Nick Brooks: I do not think there are a lot of abuses that take place in the sector.
Q443 Paul Flynn: Final question, do you think anyone would want to employ you again? You went in there and gave a clean bill of health to Kids Company.
Nick Brooks: I would think so, yes.
Q444 Chair: How many hours would an annual audit take for your firm?
Nick Brooks: How many hours? I think the Kids Company audit was a two-week audit and from memory we had three people on that, so if you work on say 35 hours a week for three people that is 230 hours, and then there would be a review process by the manager and a review process by myself, then a closing meeting and a meeting with the—
Q445 Chair: So something like 400 hours?
Nick Brooks: It might be, yes.
Q446 Chair: If you would like to furnish us with the figure, just for the record.
Nick Brooks: I will do.
Q447 Chair: How much would the audit cost?
Nick Brooks: The audit quoted was £30,000.
Q448 Chair: PwC on the basis of their 100 hours looked at the cash payment system that Camila Batmanghelidjh herself used from her weekly float and they said she only gave them “miscellaneous pieces of paper” that did not provide reliable evidence of how the money was spent. How aware of this were you?
Nick Brooks: Specifically, I am unaware of it. We might or might not have chosen one of her expenses from the sample that we undertook.
Q449 Chair: What did you as auditors find about the way money was handled by Camila Batmanghelidjh herself and how did you satisfy yourself it was proper?
Nick Brooks: As far as I am aware, any sample we took was properly documented.
Q450 Chair: So if PwC did find that, but you had not found that, you would be quite concerned about it?
Nick Brooks: Yes, we would be. We would note it, but of course in broad terms when you look at an audit you are looking at a material misstatement.
Q451 Chair: There are some very large sums of money being handled by Camila Batmanghelidjh as well as a large cash float. How do you think your firm missed that?
Nick Brooks: As I said, our samples are statistically driven and I do not know the answer to that question, I am afraid.
Q452 Chair: In an audit, if a charity is unorthodox and controversial would that not give rise to “matters of material significance” that might be reported to the Charity Commission?
Nick Brooks: I just think their operations were unorthodox. I do not believe that would necessarily be the case.
Q453 Chair: If you thought it was unorthodox why didn’t you do something about it?
Nick Brooks: When I say it is unorthodox, I think they have unorthodox methods. It does not mean to say that the methods are incorrect or wrong. My view is that everybody knew they were unorthodox in the way they were looking after their kids.
Q454 Mrs Cheryl Gillan: The management letters tend to be a little repetitive and particularly missing from them is any comment on the progress that the organisation has made from the year before. There are issues that occur repeatedly in those management letters, namely the charity’s low level of reserves and its extensive use of self-employed or contracted workers. HMRC had doubts about their status and whether really they should be full-time employees. How far did you track Kids Company’s response to your recommendations in your year-on-year management letters?
Nick Brooks: Fully. We always like the management and the trustees, because they are responsible for it, to respond to our management letter. In fact, they did give us a full response to the 2012 management letter. In 2011 they did not, and 2013 they had not, and we would have checked in 2014 whether those issues had been dealt with. If you look at the 2012 management letter, the responses are in there. Some of those refer to being dealt with in 2013, and we did in fact check that they had been dealt with.
Q455 Mrs Cheryl Gillan: You did not in 2011.
Nick Brooks: No, in 2011 they did not respond to it, and we cannot force the charity. We can only ask them to respond to it, and in that case they didn’t do so.
Q456 Mrs Cheryl Gillan: You use identical wording? It is a bit like reading one of those old statements from the police, where the full stop was always in the same place. You use exactly the same wording about the reserves and also about the self-employed workers. Surely when you reported back to Kids Company you would raise this with the trustees?
Nick Brooks: Most certainly we did, yes.
Q457 Mrs Cheryl Gillan: What was their response?
Nick Brooks: The finance committee response was that they were fully aware of the situation with regard to the lack of reserves and they were trying to improve the situation. Their model, as you are fully aware, and it is clearly stated in the accounts, is that they never turn a kid away. Of course, when there is an ever-longer line of kids, it is a model that is difficult to equate to a building up of unrestricted funds.
Q458 Mrs Cheryl Gillan: At what point would you turn around to the charity and say, “You have not responded to my recommendations year on year on year” and say, “Up with this we will not put”?
Nick Brooks: I think 2014 would probably have been the year. I knew they were fully aware of the position and my understanding was that they were doing whatever they could do to try to improve the situation. It did not affect the reserves, but it affected the balance sheet. They received a big grant from Morgan Stanley to purchase an asset, therefore they were able to show an asset on their balance sheet that improved the overall strength of the balance sheet, and they were trying to build reserves. I understood that is one of the issues they were trying to do.
When we went in for the planning meeting—we never started the 2014 audit—I was surprised that the situation had not really improved.
Q459 Chair: Can I just intervene at this point? I have a background in the venture capital world. Can you explain to me how adding an asset as illiquid as a property improves the security of the cash flow?
Nick Brooks: It does not improve the security of the cash flow at all. I did not say it did. I said it improved the figures on the balance sheet.
Q460 Chair: The figures on the balance sheet? So it does not—
Nick Brooks: No, it does not improve it at all and we pointed that out to them and I think they understood that, but I think it was one of the steps they were trying to take to improve the overall situation of the charity.
Q461 Chair: In fact, taking on that property almost gave them a liability, so it made it worse.
Nick Brooks: Yes.
Q462 Mrs Cheryl Gillan: When were you first really aware that this charity was living hand to mouth?
Nick Brooks: Right from the start. It has been living hand to mouth for quite a number of years.
Q463 Mrs Cheryl Gillan: At what stage would you have blown the whistle and said, “We will no longer provide you with the audit” and withdrawn from the project?
Nick Brooks: It is a bit hypothetical, but I think probably 2014. The presumption is when you sign off a set of accounts that the organisation will survive for 12 months after the year end. So we signed off 2013’s accounts in September 2014, and that was the stage where we did detailed work on their budgets and cash flows and assessed whether there was reliability in the organisation and that they would survive until at least September 2015. As you know, they almost got there, but not quite.
Q464 Mrs Cheryl Gillan: So you were wrong?
Nick Brooks: In hindsight, yes, but that is saying my judgment was wrong at September 2014, and hindsight can always prove judgment wrong. I believe my judgment on the information we had was correct, and indeed the Government did continue to fund them, so therefore I am not sure that one could dispute that. It was always clear that they needed Government funding.
Mrs Cheryl Gillan: Well, the Government were wrong as well.
Q465 Oliver Dowden: Another thing that your management letters address is financial controls at Kids Company, for example making sure that loan agreements were kept and that more than one signatory was required for a bank account. To what extent would you say there was a rigorous financial culture at Kids Company?
Nick Brooks: I think there was. They had a qualified director of finance, they had a qualified head of finance who was underneath the director of finance, and they had a more than adequate financial manual. I think the financial controls as we checked them were more than adequate for an organisation of that size.
Q466 Oliver Dowden: These are pretty basic requirements, aren’t they? Requiring two signatures on a cheque or keeping a loan agreement. You mentioned them in the management letters, but surely that does indicate that there wasn’t really a very good system of financial control at the charity.
Nick Brooks: I think you will find that that was in the 2011 management letter, and those improved in the subsequent two years. When you take over an audit often your management letter is longer than in subsequent years, because you are newer eyes on the block and you are spotting things. Certainly there were more points in the management letter and we checked when we went to do the 2012 audit that those points had been resolved. Indeed, there were different points in the 2012 management letter.
Q467 Oliver Dowden: You think it was poor before the first one, but you were satisfied after the initial round of management letters that there was a much better system in place?
Nick Brooks: It got better.
Oliver Dowden: Turning to another recommendation, the 2012 accounts—
Q468 Chair: Can I just ask a supplementary before you go on with that question? Would you, as auditors, be made aware of temporary loans made by trustees to Kids Company?
Nick Brooks: If they were still there at the year-end then they would be on the balance sheet, therefore we would be aware of them. We might not be aware of them during the course of the year if the transactions from the trustees were not picked up in any of the samples.
Q469 Chair: Were you aware of any such loans?
Nick Brooks: Whether or not there were any loans from trustees, certainly at the end of the 2013 year there were a number of loans, I think about £780,000 from memory, from supporters. I cannot recall whether there were any loans from trustees or not. I do not believe there were.
Q470 Chair: It has been suggested to us privately that there were loans from trustees at various periods, and even on one occasion the money that came in from the Government was used to pay off a loan to a trustee.
Nick Brooks: I was unaware of that, if that was the case.
Q471 Chair: Would you expect an audit to pick that up, or would you expect the trustees to notify the auditors of such transactions?
Nick Brooks: I would expect that there probably would be some sort of notification to the auditors of that, and we ask specifically in our letter of representation whether there are any points that need to be brought to our attention.
Q472 Chair: So you think there is an obligation on trustees to notify the auditors of a transaction of that nature?
Nick Brooks: I am not sure there is an obligation for them to do so. I think it would be useful for us to know about it.
Your question is whether it is right to be using Government money to pay the loans off. It depends on whether one believes that the Government money is isolated from all the rest of the funding that the charity receives from its donors, and whether it is any more important than the donor money that they get.
Presumably the trustee gave the money to enable the charity to continue operating and then, when there was sufficient money from whoever it might be, they asked for it back, as it was only a short-term loan.
Q473 Chair: If such an arrangement happened in a public company, for example, it would certainly be a notifiable transaction. Do you think for charities over a certain size there ought to be a similar accountability about the arrangements?
Nick Brooks: I personally think it should have been disclosed as a related party transaction.
Chair: Exactly. Moving on.
Q474 Oliver Dowden: I was going to address the issue of trustees, which you raised in your 2012 letter. You said specifically that there had been very little change in the charity’s board of trustees for some years and you recommended that the length of the trustee tenure be considered. What do you think would have been the appropriate response to this recommendation?
Nick Brooks: “We will do so.”
Q475 Oliver Dowden: It did not appear in 2013, so did you feel that they had done so?
Nick Brooks: They appointed two new trustees, as I recall, in 2013. It is a difficult area. Not everybody wants to be a trustee, as you can imagine—and this is not helping—and therefore it is not so easy just to wheel people in as trustees. You do not want to completely change a whole board or you lose the corporate memory, so you need to do it in stages. What we were suggesting is that they had a staged change of trustees, a couple going each year.
Q476 Oliver Dowden: They only changed two trustees in one year, but you dropped the recommendation.
Nick Brooks: I think they did it in 2013 as well, therefore our recommendation in 2013 had been implemented.
Q477 Oliver Dowden: Then the implication is that you did not particularly feel there was any need for further change?
Nick Brooks: We felt that was part of what they were doing. If you make a recommendation to a client and they say, “Yes, we are putting that in process and we’ve changed these two this year and next year we are going to change two”, then our view is that they have taken on board our recommendation. We do not need to put it as another management letter point.
Oliver Dowden: This is one of the things that has consistently come up during the evidence that we have heard.
Chair: We are going to have to press on. We are running out of time.
Q478 Oliver Dowden: One of the things that has come up is the length of tenure of the trustees, in particular the chair of the trustees, so was that something that was a cause for concern for you?
Nick Brooks: A cause for concern is probably too strong. I think good governance would have indicated that they should have looked to change, even if they changed within the trustee board. If they wanted to keep the chair on, you could bring another person up as chair of that board.
Q479 Mr Andrew Turner: In 2011 Kids Company’s free reserves were in deficit and they remained very low compared to the size of subsequent years. In your experience of the sector, what level of free reserve should Kids Company have maintained?
Nick Brooks: It is always very difficult to be precise about these sorts of things. I personally think they should have worked on the basis of a number of months. A simple way is work on a number of months of expenditure. If you are a sophisticated organisation, you would work on the basis of linking your risk to your reserve, so you would say, “What are our risks?”
Q480 Chair: How many months?
Nick Brooks: I do not know. Six months, probably.
Q481 Mr Andrew Turner: Six months equals what?
Nick Brooks: Well, very roughly £23 million a year, so six months of that is about £12 million, maybe. The difficulty there would be that of course everybody looking at it would say, “Well, why have you kept £12 million back when you have had all this funding?”
Q482 Mr Andrew Turner: What did you consider your role to be in advising Kids Company in this area?
Nick Brooks: I think our role was to point out that we felt that the reserve level was very low. I think we made it very clear that there were reputational and financial risks to the charity should any of the funding streams cease. Indeed, that is exactly what happened.
Q483 Mr Andrew Turner: How far do you think the trustees and management appreciated the necessity?
Nick Brooks: I think they did appreciate the necessity. The question is how well they went about trying to deal with it, or how well they were able to do it. As I said earlier on, a model where you never turn a kid away is very difficult to operate if in fact you are trying to build up unrestricted reserves.
Q484 Mrs Cheryl Gillan: Going back to the management letters, when you took on the audit of Kids Company you obviously talked to MacIntyre Hudson and you had seen the management letter that they produced—the last one in particular. In that, MacIntyre had called the charity’s spending model, “A very risky strategy that could put the charity in a potentially insolvent position”. When we get to your management letters you then state that, “The lack of reserves could have an impact on Kids Company sustainability and result in negative publicity and reputational damage”. How far did you agree with MacIntyre Hudson’s assessment that the Kids Company business model put them at risk of insolvency even back in 2010?
Nick Brooks: I think we probably agreed with it. Nothing has changed. As I said a bit earlier, it has always been living on a knife edge, which is in my view portrayed quite clearly through the notes to the accounts.
Q485 Mrs Cheryl Gillan: Why did you change the language?
Nick Brooks: Different firm, different language.
Q486 Mrs Cheryl Gillan: Surely that should have made you even more alert to potential problems with the way in which this charity was being run?
Nick Brooks: I believe we were alert to the way the charity was being run.
Q487 Mrs Cheryl Gillan: Did MacIntyre Hudson withdraw from the audit?
Nick Brooks: No, it was a tender, an ordinary tender.
Q488 Mrs Cheryl Gillan: Was your tender particularly low to get this?
Nick Brooks: No.
Q489 Mrs Cheryl Gillan: When you took it on were you pleased to get it?
Nick Brooks: Yes, I think so. It would be disingenuous of me to say that we are not pleased to win new work. It was a good client.
Q490 Mrs Cheryl Gillan: Even getting new work when you have an audit report from the previous auditors that would make me look at it twice?
Nick Brooks: Yes. I suppose in hindsight one might look at that, but we accepted it with our eyes wide open. It went out for tender and someone had to do it, and I thought we would be able to add some value to them.
Q491 Mrs Cheryl Gillan: In fact for three years you allowed the same problems to continue without the charity taking any action to address those problems.
Nick Brooks: I do not think it was just three years. I think it has been like it for a number of years, but we were encouraging the charity to address the problem. While they were maintaining their funding of course they were able to survive.
Q492 Mrs Cheryl Gillan: In your written evidence you said to us that Kingston Smith had signed Kids Company off as a going concern because the trustees had assured you that the charity would have adequate cash resources, and that the finance committee used a rolling monthly cash flow to make decisions about the charity. How did you satisfy yourself that those assertions made by the trustees were realistic and not just a best case scenario?
Nick Brooks: Quite. The point I think I was making there was that the responsibility for signing the accounts is firstly with the trustees, and it is very much important that the trustees satisfy themselves that the organisation can survive for 12 months afterwards. We also check those assumptions and we checked the budgets and the cash flows for the next 12 months and assessed reliability based on history and previous matching to budgets and cash flows.
Q493 Mrs Cheryl Gillan: You were absolutely convinced that they had adequate contingency plans?
Nick Brooks: Absolutely convinced? My judgment was that they would survive for the following 12 months. I signed off the accounts on that basis.
Q494 Mrs Cheryl Gillan: Do you want to comment on your judgment in retrospect on this?
Nick Brooks: I think my judgment in retrospect is very difficult. You make a judgment at a time. You do not make a judgment in retrospect. If you made a judgment in retrospect you would probably come up with a different judgment, but as I said earlier the presumption is that they would survive at least 12 months—they survived over 10 months—and I am not sure it was all due to the funding streams. The nail in the coffin—it was out of our hands—I think was the sexual abuse allegations. I have not spoken to the trustees, but I understand from the trustees that they felt that would curtail any future funding.
Q495 Mrs Cheryl Gillan: Did you debrief the audit teams after they came out of a finance meeting?
Nick Brooks: I did not personally, but the manager always debriefs the audit team.
Q496 Mrs Cheryl Gillan: Was the debriefing by the manager of the audit teams always positive? It was never felt there was anything hidden from your auditors in any way? You had complete access?
Nick Brooks: Yes. No, nothing at all.
Q497 Mrs Cheryl Gillan: So there was nothing to raise your suspicions about the way in which money was handled or receipts were there or not there, or access to systems, it was all completely open?
Nick Brooks: Yes.
Q498 Mr David Jones: I would like to return to the point that the Chairman raised with you a little while ago about the duty of auditors to report matters of material significance to the Charity Commission.
Was there ever a point in your dealings with Kids Company at which you felt you were close to doing that?
Nick Brooks: To be honest, I do not think there was.
Q499 Mr David Jones: You have told us that the company failed to respond to your 2011 management letter. Was that not a matter that caused you that sort of concern?
Nick Brooks: We would like it to happen; many clients do not unfortunately.
Q500 Mr David Jones: But this of course is a charity which places additional responsibilities on the trustees.
Nick Brooks: Many charities do not.
Q501 Mr David Jones: Is that right?
Nick Brooks: Yes. We always check going forward in the following year that those points we have raised have been dealt with.
Q502 Mr David Jones: But in this particular case they did not respond at all?
Nick Brooks: No.
Q503 Mr David Jones: So I repeat the question. Did you not regard that as a matter that was so unusual that it should have been referred to the Charity Commission?
Nick Brooks: My answer is I do not think we thought it was so unusual that it should be reported to the Charity Commission. I personally would think that the Charity Commission would be inundated with those sorts of comments if that was the case. We always endeavour to get our clients to respond to the management letters. It is an important aspect, and I am sure we would have chased them for the responses.
Mr David Jones: “Matters of significance include failures of internal controls, including failures in charity governance which lead to significant charitable funds being put at major risk”. We have heard about the problems that they had repeatedly with reserves. I think that in 2011 the reserves were actually in deficit. In subsequent years they were extremely low, certainly far lower than the £12 million or so that you have said they should have made provision for. Your management letters state that the lack of reserves could have an impact on Kids Company’s sustainability
At what point would you have considered that repeated problem with reserves was a matter that should have been raised with the Charity Commission?
Nick Brooks: I suppose if we felt there was a real risk that their funding was going to completely dry up and they were not continuing to fundraise—I think in all the years that we audited the actual income went up so their fundraising in fact was quite significant. As I said earlier, unfortunately it is the model that is difficult. If you never turn a kid away, it is very difficult to ever build up your reserves. Whether that is a point that would need to be raised with the judgment is a difficult area. I had not considered whether that would be an area and going forward I would think about that.
Q504 Mr David Jones: So you had not considered whether or not this was a matter of significance that should have been raised with the Charity Commission?
Nick Brooks: Our concern was whether in fact we could sign off the audit report. If we had not signed off the clean audit report that would have been a matter of significance for the Charity Commission. We did what checks we needed to do to satisfy ourselves that the organisation was going to survive for the next 12 months and we were able to give a clean audit report.
Mr David Jones: Clearly in this particular case—
Nick Brooks: It did not.
Mr David Jones: —in hindsight it was not viable.
Nick Brooks: Hindsight is a wonderful thing.
Mr David Jones: It had been on a knife-edge, as you put it, for some considerable time.
Nick Brooks: It had.
Q505 Mr David Jones: Charity moneys were put at risk and they were lost, were they not?
Nick Brooks: Yes, ultimately that was the case.
Q506 Mr David Jones: Do you not feel that you acted in breach of duty to the Charity Commission in not raising this as a matter of significance?
Nick Brooks: I am not sure I would go as far as to say that, but it is something that I would obviously take away with me and consider for future reference.
Q507 Chair: Can I thank you for the honesty of that?
Nick Brooks: Sorry?
Chair: Can I thank you for the honesty of that response? It was very refreshing.
Nick Brooks: Right.
Q508 Chair: What is striking is that the business model was demand led. There was no way that the business itself felt an obligation to control the cash going out through the door. I know from conversations with other trustees that it was very hard to put in place any kind of contingency plan, and you must have been aware of that. Whatever you thought about the growing income, you must have understood that this was only as good as the last donation; it was a very precarious income stream. At the first hint of serious reputational risk to the charity, it fell over. A very high-risk model I think you would agree?
Nick Brooks: Yes.
Q509 Chair: I suppose I am just reinforcing this point, which I think it is quite likely we will refer to in our report, which is that the auditors missed this very fundamental risk and perhaps should have considered its duty to the Charity Commission more seriously.
I am not going to say this is an Enron moment for professional firms involved with Kids Company, but there is a sense there is a sort of collective passing of the buck, which I am rather uncomfortable with. I have to say that you seem to be accepting a little bit more responsibility as the auditors and I commend you for that.
Q510 Ronnie Cowan: Richard Heaton told the Public Accounts Committee that the Cabinet Office worked with the charity’s external auditors and attempted to decide whether to hand over the last £3 million. Can you outline the nature of your work on this?
Nick Brooks: I saw that and it is untrue.
Ronnie Cowan: Untrue?
Nick Brooks: We did not.
Ronnie Cowan: There was no—
Nick Brooks: Not at all, absolutely not at all.
Ronnie Cowan: That answers my question. Thank you.
Q511 Mr David Jones: You had no dealings with the Cabinet Office at all?
Nick Brooks: None whatsoever.
Chair: How interesting.
Q512 Paul Flynn: You were frank in saying you were going away to reflect on the evidence you have given this morning, but the impression that has been given to us by the witnesses we have had, is that the auditors were called in and paid to form a human shield to protect the interests of a failing charity. That is bad enough as far as misuse of public funds is concerned, but it is very serious in the fact that the charity was not fulfilling the needs of the children they were supposed to represent and those children were very badly let down according to the evidence we have had.
There were very few children there. The money was being wasted and much of the work the charity had done was damaging and not beneficial in distributing freely huge sums of money. Do you feel a sense of guilt?
Nick Brooks: I do not think auditors can make moral judgments. We have to look at the facts. Our audit is defined by law and by international auditing standards, which we follow. If we started making moral judgements about things it would rather complicate matters.
Q513 Paul Flynn: Your work was used to continue an abuse of public money and neglect of children. Do you not feel guilty about that? And the other auditors as well?
You have been prayed in aid—they had clean audit, everything said everything was hunky dory. You were the author of one of those reports, which you were paid for, but the children suffered.
Nick Brooks: I am not sure I have an answer really to that question, I am afraid.
Paul Flynn: I am sure it is something else you can think about.
Nick Brooks: Yes, I can and I am going to.
Q514 Chair: It is a reminder of how broad the obligations of auditors actually are.
To clarify one thing: the then Permanent Secretary of the Cabinet Office, Richard Heaton, told the Public Accounts Committee that the Cabinet Office worked with the Charity’s external auditors and you are categorically saying that that is not your understanding?
Nick Brooks: Yes, it is not my understanding. I saw that yesterday; I was watching it on the screen, and I was surprised.
Chair: We will have to address that with him.
Nick Brooks: Yes. I would be interested to know what he means by, “Working with external auditors”.
Q515 Chair: The other point that arises: the Guidance to Trustees on the Charity Commission website does say, “Beware allowing your own prejudices or a dominant personality clouding your judgment”—or words to that effect. What obligations does an auditor have when conducting an audit to understand that might be happening in a business or a charity?
Nick Brooks: I think it is important. The Founder’s Syndrome is not unusual in charities and this was a case. We were quite aware of it and we believe our audit tests would have uncovered anything on that line.
Q516 Chair: Should have?
Nick Brooks: Should have uncovered anything.
Q517 Chair: But perhaps did not?
Nick Brooks: Perhaps did not.
Q518 Mrs Cheryl Gillan: Knowing that this charity was in receipt of such large amounts of taxpayers’ money, would you have instructed the auditing team to take a higher duty of care?
Nick Brooks: A lot of our charity clients receive money from local and central Government. I think I would reverse it by saying that, whoever gives money, it is important and I do not think you should give a higher duty of care to an organisation that receives Government money than you would do if it received individuals’ money because an individual’s money is just as important. The charities are there on a fiduciary basis, they are looking after other people’s money whether it is Government’s or whether it is individuals’.
Q519 Mrs Cheryl Gillan: On a similar basis, because this was such a very high-profile charity, would you have issued any instructions for your audit team to be particularly alert to look out for anything suspicious?
Nick Brooks: Yes. Our planning would have taken that into consideration, to look at these various areas along those lines.
Q520 Mrs Cheryl Gillan: It is true to say that with a very high-profile charity like this, any failure would result in a very high profile as well?
Nick Brooks: Yes.
Mrs Cheryl Gillan: Thank you.
Chair: Thank you very much indeed.
We are going to take a very brief adjournment.
Sitting suspended.
On resuming—
Examination of Witness
Witness: Sue Berelowitz, Former Deputy Children’s Commissioner, gave evidence.
Q521 Chair: Thank you very much for being so patient and waiting for so long. Can I ask you to identify yourself for the record?
Sue Berelowitz: Yes, thank you. Thank you for inviting me here. My name is Sue Berelowitz; I was Deputy Children’s Commissioner of the Office of the Children’s Commissioner from 2008 to the end of April of this year and also the Chief Executive of the Office of the Children’s Commissioner. I am a visiting professor at Bedfordshire University and independent consultant specialising in child protection and youth justice, in particular in children’s rights and I need to declare to this Committee that I am a trustee of a charity called SafeLives, previously known as CAADA.
Q522 Chair: Thank you very much for that declaration and background. In the time available, which is only about 30 minutes, will you just make sure that you say what you need to say to us, whatever questions we are asking, because we are not trying to tie you down, we are interested in your views and opinions about what you know.
Briefly, what gap in the statutory provision do you see Kids Company as attempting to fill?
Sue Berelowitz: It was attempting to fill the gap that would normally be covered by section 17 of the Children Act 1989, that is to provide support to children who were in need under the terms of the 1989 Act. So child protection would definitely come within the ambit of the statutory agencies, local authorities and police. That is the gap that in fact, in my experience, most charities in the children’s sector are seeking to fill.
Q523 Chair: What did you understand about the relationship between Kids Company and the local authorities who provide the statutory services?
Sue Berelowitz: It was very poor. It was unusually poor in my experience. I visited charities up and down the land from the very small to the very large and it does not mean that the relationship I find is always easy, it can sometimes be uneasy. But I have never encountered the degree of hostility by a charity towards local authorities as I encountered over the years, across my three visits spanning several years, in Kids Company. In a situation that Camila told me about, one of the local authorities had taken out injunctions against Kids Company to prevent them from accessing particular children, which I had never encountered before.
Q524 Chair: Which authority was that?
Sue Berelowitz: My understanding is it was Southwark. Whether there were others I do not know, but my understanding at the time was Southwark.
Q525 Chair: The director of Southwark has told us quite vehemently that Southwark fulfils all the statutory obligations; there is no gap in statutory provision. Equally, we have heard from witnesses who tell us that technically might be true, but there is a very large gap in the provision of support for certain kinds of children with cross-discipline needs. What do you think about that debate?
Sue Berelowitz: I used to be a deputy director in local government myself, in children’s services, so I can say with my hand on my heart, I am not confident that there is any local authority in the land, including where I had those responsibilities myself, where we could all say that we were discharging all our obligations under section 17 because the numbers of children in need in this country are quite substantial. So it requires a large amount of resource to meet all those needs.
I think there is an additional question of whether Kids Company was actually filling the gap that it was purporting to fill. That is the really serious question and my concern was that there was a big discrepancy between the rhetoric and the reality.
Q526 Chair: Where would we find best practice between a charity providing this kind of support for young people and the relationship with the local authority? What would be the model that we should be promoting?
Sue Berelowitz: There is an awful lot of best practice around the country so I can reference very small charities like Imara, for example, up in Nottingham working with small numbers of children who have been victims of sexual abuse by and large, in an extremely sound way. I have met with the children, I have met with the staff, I have done the triangulation that I would normally do to check out veracity of what I am hearing. It goes right through to Barnardos and the NSPCC, where I visited only some of their projects but have seen some outstanding practice on the ground. So there is a considerable range of very good practice and I think it is worth holding in mind that many charities, probably the bulk of them, are doing what they set out to do.
Q527 Paul Flynn: They gave you the runaround, didn’t they? You say in your very interesting report that you visited three times you and you specifically asked to see the premises, to see the children. The first two visits you had the Batmanghelidjh experience, but you did not see any children or any premises. The third time you went, I think you had great difficulty in finding any children at all. You did find a group of four, two of them you believe were the children of some of the staff. Plenty of staff there, but no children.
Sue Berelowitz: Plenty of staff.
Paul Flynn: What was your conclusion to this?
Sue Berelowitz: It was an unusual experience for me to find a charity that was not very keen to put its children before me and let me speak to them. They usually want to showcase their work and they want their children to talk to me. So it was an unusual experience for me to find that I was having to battle to get in to the project and see the work on the ground floor myself and meet the children. As you know from my report, it took several visits. So in the final visit, when I did get to some projects, the deduction I had to make was that there was a gap between what I was being told and what was going on. For example, we have just heard about Kids Company saying that their policy was to never turn a child away and if you look at the figures you are hearing about 36,000 children and their families. What I saw was very, very few children using those services. I came away feeling quite some disquiet about that gap, quite frankly, and questioning what the reality was.
Q528 Paul Flynn: What could you do about that?
Sue Berelowitz: I have given a lot of thought to that. I contacted the director of Children’s Services in Southwark, because those projects were in Southwark. I had not seen anything that raised particular child protection concerns for me, which would have been a different story, so it was really about saying, “I am concerned that the resources are not being used to good effect”. There are a lot of children in need in Southwark and there were these wonderful unused resources. There was nothing that the director was in a position to do.
It has been interesting listening this morning. Should I have contacted the Charities Commission? It is possible that I should have contacted the Charities Commission about that. But that was my concern. There was not a clear avenue for me to go down.
Q529 Paul Flynn: I do not know if you have read Harriet Sergeant’s book “Among the Hoods”, but she gives a very vivid account, and we think a very accurate, moving, painful account, of life among the young people in that area. What is unquestionable is that there is a huge need there that was unmet by Kids Company, although they were receiving huge sums of money to fulfil that need and to look after the children. Was that your impression from this?
Sue Berelowitz: That was certainly my concern. Visiting a building that was set up for child and adolescent mental health services, having heard about this extraordinary need that they claimed to be filling, and finding that there was nobody using those services on the day was troubling, to say the least. It just made me ask questions such as, “If the pressure on services is so great why isn’t this place crammed to the gills with children booked in for their sessions?” Similarly with the after school club that I went to; similarly with the feeding time, so to speak. The figures just did not add up.
Q530 Paul Flynn: Obviously, relationships had broken down between Kids Company and the Southwark local authority, but what is the best way out of this now? What is the best way of catering for the needs? We have seen the representative of the authority and they have talked about the small number of children involved, but they also talked about people who were self-referring and said that virtually everyone was given therapy whether they needed it or not. We could not find any way in which this was assessed. Do you think there should be some kind of rescue for those children now?
Sue Berelowitz: First, one has to question what the real level of need was. There is undoubtedly a very high level of need. There are a lot of children in London and across the country who are living in poverty. I, myself, commissioned a report as Deputy Children’s Commissioner into gang-involved violence, which included the London borough, so I am acutely aware of the level of need. At the same time, I would question claims to be providing all of these children with therapy. I was concerned earlier to hear the auditors’ evidence about case workers/therapists saying that a child needed a pair of shoes or clothing or whatever. How many of these people were actually therapists? What controls were in place to manage and monitor the quality of work and the recruitment? I haven’t undertaken an audit, but those are the kinds of questions I would want to ask were I doing that. How many of these children were actually getting therapy, what was the nature of the therapy required, what were their actual needs? So in terms of what the local authorities should be doing, through their joint strategic needs assessments, they have a duty to examine the degree and level of need within their area, among both children and adults. They should be quantifying that, but it has to be adequate and resources have to be apportioned on the basis of the identified need.
Q531 Paul Flynn: We have spoken privately to two journalists who very courageously and with great skill did put this issue into the public domain, but shouldn’t you or some other person have alerted us to the fact that they were not doing the job? They didn’t have 36,000 children, they probably didn’t have 2,000 children and they were getting money on false pretences and the children in great need were not getting any services at all?
Sue Berelowitz: I agree, that is of immense concern. Even with hindsight, I am not sure—other than maybe I really should have contacted the Charities Commission—to whom I should have made a report about this. It is not clear, and that is one of the things I am hoping will be addressed by your important inquiry. I have done a lot of thinking about some of the safeguards that could be put in place, which I would be happy to share with you if there is time or to send to you in writing, but I think that is one of the lessons that need to be learned about this, what does one do? There were some people who wished to be whistleblowers, and the Children’s Commissioner and the Office of the Children’s Commissioner is a prescribed person and body, but I know from people who wish to come to us from other organisations in different circumstances, that there is no protection that a prescribed body can offer to a whistleblower. So there are a number of things that need to be looked at really in this context.
Q532 Paul Flynn: Do you think any part of this was because the charity uniquely had friends in the highest places in the land? They had this patronage. One of the elements put to us is that Batmanghelidjh knew the medical history and the criminal history of all the people she employed and many of the children, and that she had a hold over them that encouraged silence?
Sue Berelowitz: Well I have heard a number of things this morning that have shocked me. I didn’t know there were concerns that she knew about the medical histories of her staff. I find that shocking. In my view, there is no doubt that the chief executive used her forceful personality and her friends in very high places to intimidate people and make sure that she held sway really, right up to Prime Ministers, celebrities, people in the Lords, people in the media. I have gone back and reviewed quite a lot of the media reports in preparation for this and it is very interesting to see how everybody was buying into the story really, the narrative. I have no doubt at all and, indeed, references to Kids Company being unorthodox and controversial in my view should flag up a concern and be an indicator that everybody ought to be looking at it with an even more precise eye than they would do otherwise. Controls are there for a purpose.
Paul Flynn: I am grateful to you.
Q533 Chair: On this, you worked for a statutory body that inspected things?
Sue Berelowitz: No, can I correct that? We were not inspectors. We had a duty to promote and protect children’s rights. So I used to—
Q534 Chair: Okay, I beg your pardon. But certainly other bodies like CQC, Ofsted, they have a role in inspecting?
Sue Berelowitz: Yes.
Q535 Chair: Aren’t you surprised that there was no statutory inspection of Kids Company, or if there was she saw it off?
Sue Berelowitz: Yes. Again, I have given that a great deal of thought, because if they were going to inspect one charity, they would need to be inspecting them all and my understanding is that there are something like 165,000 charities in this country. So that is a huge industry that would need to be developed.
What I am surprised about is that the funding bodies, particularly Government, given that such large funds were coming from them, were not requiring much more detailed audits and satisfying themselves that the money was spent for the purposes for which it was intended. It is the responsibility of trustees to ensure that money is spent according to the charitable purposes.
One of my thoughts has been about the accounting officer for the relevant Government Department being held to account for Government funds that are disbursed to charitable bodies, whether this or any other body, so that they are personally held to account.
Chair: Of course the accounting officer has been in front of the Public Accounts Committee.
Q536 Ronnie Cowan: We were talking about Kids Company providing therapy and educational services, but they are not regulated.
Sue Berelowitz: No, they weren’t regulated. There is a problem around therapeutic services anyway insofar as anybody can call themselves a therapist and say that they are offering clinical services because it is not a protected profession. I do think that that is problematic and this case has highlighted some of the problems around that. Certainly if they were part of the NHS they would have been inspected by CQC, but they were outside that and, again, I think one of the important questions that arises from what has happened in Kids Company is that you are effectively talking about public money. There were some substantial private donations, but effectively it is public money. There are parallels, for example, with private boarding schools and special needs boarding schools. Most children will be funded by the local authority or the Armed Services, but the money coming in is taxpayers’ money. Yet they are outside the public sector and therefore outside of the inspection arrangements that apply. I do think that that requires investigation.
Q537 Ronnie Cowan: So where should the external scrutiny come from then?
Sue Berelowitz: Can I just share my thoughts on that? I have spoken to a lot of people, both sitting on governing bodies of schools and sitting on charitable boards—as you know, I sit on one myself—and no one thinks that what is required is that Ofsted should go in. First, that would be a whole new industry; a huge number of inspectors would need to be recruited, and people need to know what they are looking for. The fact that an inspectorate goes in does not guarantee that. I can tell you that I used to lead all the work on youth justice for the Office of the Children’s Commissioner and led all visits to the children’s secure estate. In secure training centres and in secure children’s homes I have found extremely concerning violations of good practice that had simply not been picked up by the inspectors. So the important thing is that people need to know what they are doing; I will say something about that in a second.
I think there ought to be a maximum term for chairs and other members of the board of trustees. I have had people say to me that it should be one four-year term only; others think that it could be rolled over to two terms. There is obviously an issue in that when a charity is founded everybody joins at the same time, so you have to find a way to stagger that in the first instance. My recommendation would be no more than two terms and a staggering in the first instance to ensure that some only do four years, some do six, and so on. Perhaps some could do two terms, but there should be an absolute maximum of eight years for everybody.
There must be much more rigorous oversight by auditors, both internal and external. Particularly having listened today but I have to say having given this some thought previously, I am quite attracted by the idea of auditors having to demonstrate their expertise in whatever field it is—for me, obviously it is children’s services—before they can lead a team or even be on a team to undertake an audit. What struck me this morning is how the audits were very much about looking at paper; we can talk about never turning a child away or just the huge numbers but where is the verification? If you are talking about money being spent for charitable purposes, if the children are not there you are not spending the money for those purposes, even if the receipts seem to say that you are.
There are some parallels. In family law, for example, lawyers have to apply to be a member of a panel and demonstrate their expertise. People are then confident that when they go to that panel to seek a lawyer they are engaging somebody who has demonstrated that they have passed a particular threshold in terms of their knowledge and expertise in child and family law. There could maybe be something parallel for auditors, that they have to have expertise. If you do not know what questions to ask, you are not going to ask them and you are never going to drill down. I always do a triangulation. In children’s prisons I would ask to speak to the governor to find out what was going on, then insist on speaking to children on their own and speak to staff on their own as well as, of course, using my eyes and ears. Then you begin to find out whether what you have been told is borne out by everybody else as well as the records. Just taking it from one person or looking at a set of records gives you a very partial story. But you have to know something in order to do that.
I would say it is the responsibility of the Charities Commission to investigate breaches that are reported to it. Those are breaches around charitable purposes, and the seven standards of public life. It is very clear that all trustees are bound by the seven standards of public life. Any breach of that is a violation. Obviously there are also issues of fraud—if money is not used for the purpose for which it was given—and any serious governance breaches. People who join boards are supposed to be mature and responsible, but I do think there should be an emphasis on self-regulation with safeguards put in place. Now, some of those I have mentioned, but some of the others I would like to propose to this Committee. In the annual report and financial statement the following declarations might be useful, and should be signed off by the chair explicitly on behalf of the whole board. It is very clear—I have the “Good Trustee Guide” here with me as my bible—that everybody on a board is collectively and equally responsible for the decisions taken. But to be quite explicit about that, in the annual report and the financial statement, the chair should sign off that all trustees are fit persons and if any are not, state what action has been taken. Indeed, if they have been found not to be a fit person in relation to a role that they hold on another board, the chair should state what has been done.
All boards should confirm that their trustees have undergone an annual refresher on their responsibilities and accountabilities and that that has been done according to the standards set out in the “Good Trustee Guide”. They should confirm that they are satisfied that the outputs and outcomes reported have been verified—on the question of the 36,000, where was the attempt to verify those sums or indeed the numbers of children being fed? It should be confirmed that all funds are used as per the purpose for which they were given; and that board members have visited projects and seen the work in action and are satisfied that the work being undertaken fulfils the charitable purposes and objects set out. As I say, this would be signed by the chair on behalf of all trustees. Papers on the appointment of chairs should be kept available for scrutiny by auditors. There is the question whether somebody external should sit on any appointments panel for the chair. I do think that is a good idea. These things can always be manipulated, but nonetheless I think that is a good idea. It could be an auditor who sits there as an observer. Auditors should review the quality of the governance at least every two years—ideally, I would say annually, but at least every two years and the charity obviously would have to pay them to do that. I was surprised to hear, if I heard correctly, that the last audit report was in 2013. I would expect audit to be happening on an annual basis, not the governance review, but audit to be happening on an annual basis. So that I just take as a given.
Somebody suggested to me that it would be a good idea that every board of trustees should have some sort of external or arm’s length individual attached to it who would sit outside as an observer but could provide some independent scrutiny of what goes on. Now, you are talking about large numbers, but it is an interesting thought.
The last point I would make is that there should be some kind of a kitemark for boards. There is Lexcel for lawyers, Investors in People as well—there will be others—but it sets out a standard of best practice to which people can aspire. So you could have a kitemark for governance—bronze, silver, gold potentially—and people would have to demonstrate that they had met those standards, which would be independently scrutinised. There may be some kind of carrot attached to that; insurers may be interested in giving a discount on directors’ and officers’ insurance for those who have personal liability where they can demonstrate that they are conforming to the highest levels of a kitemark. Some kind of kitemark might be useful.
I can do further thinking, but those are my preliminary thoughts.
Chair: Thank you very much—very comprehensive. We do not mind you giving a very long answer to that because it was very full. Gerald, do you need to press your question, do you think, after that?
Gerald Jones: I don’t, we had a very detailed answer there, thank you.
Q538 Mrs Cheryl Gillan: Just quickly, as Deputy Children’s Commissioner, you are a pretty important person I would have thought as far as Kids Company is concerned or any children’s charity is concerned. Yet I understand from your written evidence that you visited three times; twice you did not really see any children at all and you got the office treatment, and the third time, even though you had made the arrangements with Camila Batmanghelidjh’s office they were not expecting you at all. So you had a tour that was obviously not on the stocks and you said you had significant unanswered questions then about the true scale of the work and, in fact, what was being delivered there.
Presumably you visited lots of other charities. Can you just say whether that had ever happened to you before with any other charity that you had visited?
Sue Berelowitz: No.
Q539 Mrs Cheryl Gillan: It was truly a one-off?
Sue Berelowitz: It was absolutely a one-off. People are normally tremendously keen to showcase their work and make it possible for me to talk to the children and young people with whom they are working, including on their own.
Q540 Mrs Cheryl Gillan: It makes it impossible for you to discharge your duties?
Sue Berelowitz: Very, very difficult indeed. The longer it went on that I could not get out to the projects and see the children the more I began to think, “I need to get there. I really need to get there”.
Mrs Cheryl Gillan: I think that leads neatly on to the next question.
Chair: I want to go back to Gerald, I think it is an important question.
Q541 Gerald Jones: I want to explore what your understanding was of Ms Batmanghelidjh’s role in the day-to-day running of the centres, specifically around decisions on individual young people in financial and clinical matters?
Sue Berelowitz: I did not look into that. So it is more anecdotal—the conversations I had. I can’t say I did any sort of incisive investigation into that or examination of that. Certainly she was talking about individual cases when I met with her. It would not be possible, if the claims had been accurate, for her to know about all 36,000 children or indeed a much smaller proportion of those, but my perspective was, and the impression I came away with was that she was very much in control of what went on. The ethos, the way in which things were run, the general comportment of the organisation; it was very much my view that this was an organisation with a strong figurehead.
Gerald Jones: Thank you.
Q542 Mr David Jones: At the time that you paid your visits to the Kids Company I assume you were aware that the Government was funding the activities of that charity to a large extent. You acknowledge that maybe in retrospect you should have alerted the Charity Commission to your concerns about the way the charity was operating. Did it occur to you that, given that the Government were subsidising it to such an extent, maybe you should have gone to the Government and said, “Look, there is a problem with this charity”?
Sue Berelowitz: Well, it did not occur to me at the time. It has occurred to me subsequently and I have thought about why it did not occur to me at the time, and I go back to the issue that was raised about, in a sense, the powerful alliances that the chief executive of Kids Company had. I am a fairly robust and resilient person and I was in a quite substantial position and I acknowledge that even for me it would have been very challenging to have gone to No. 10 and said, “I am concerned” because to take a stand against somebody who was constantly telling you about celebrities or relationships with people in the very highest places is quite intimidating.
Q543 Chair: So you felt intimidated?
Sue Berelowitz: Not in her presence. As I say, I am fairly robust, but in terms of thinking, “What do I do with this?” yes it gave me great pause for thought. Yes.
Q544 Mr David Jones: So you considered it, but decided against it or you didn’t even consider it because of the experience you had had?
Sue Berelowitz: I have no recollection now, in hindsight, that I thought at the time, “I need to tell Government this”. My concern was that the money was not being well spent, but I was acutely aware that she occupied a very powerful position and it would be difficult to make those kinds of representations. Quite frankly, I do not think my voice would have been a good counterweight.
Q545 Mr David Jones: What sort of questions do you think that the Government should ask when deciding whether or not to fund charities delivering services to young people?
Sue Berelowitz: I have another little list because, again, I do think that that is tremendously important.
It strikes me that the Government should have a code of conduct with regard to charities in order to prevent people from being able to secure funds through the force of their personality or who they know. There should be an obligation for all funds to be disbursed on the basis of the normal processes that are set out—so competitive tendering or for a grant proper scrutiny of the application and it should be open to others to apply. So, again, I would expect it to be on a competitive basis.
I do think it is absolutely critical that Government Departments should satisfy themselves that the funds are being spent as they are meant to be spent. That is a responsibility for Government. So they should have required annual reports and they should have verified for themselves that those reports were accurate; that the figures were verifiable, statistics were quantifiable. So I think there needs to be an obligation on Government to do that. Funds should not be provided on the basis that people are using emotive and emotional language about their client group in order to elicit charitable funds from the Government or saying that the Government will face a very hard time from the media should they not cough up. I simply do not think that that is acceptable. The consequence of this has been very, very large sums of money that have not, by definition, gone to other places where they could have been used. There are plenty of children out there who need the money and it is very disheartening to go into a beautifully equipped environment where you know it should be crammed to the gills and there is nobody there. It is very disheartening indeed and uncomfortable.
So, yes, I think there are obligations on Government to satisfy themselves. I have mentioned about accounting officers being held accountable for the funds disbursed and said that people must require evidence. I have already mentioned joint strategic needs assessments but if large sums are being given out as they were in this case, over and over and over again, someone should check against the local JSNAs for all the areas covered whether they reflect the need expressed by the charity and, if not, what is the narrative behind the gap. Which story did one believe or what was the evidence that needed to be gathered in order to be satisfied that the need being claimed for was a real and true need?
So I think there are some safeguards that can be put in place. I do understand that officials and others indeed within Government were rightly concerned, and their concerns were not always taken seriously. A letter of direction was written. I do wonder, in such circumstances, whether those letters should be a matter of public record so that there is full transparency.
Q546 Mr David Jones: One letter of direction was issued.
Sue Berelowitz: I am only reporting from hearsay. I have an understanding that a letter of direction was issued, but it is not for me to verify that. That is only hearsay.
Q547 Mr David Jones: We have heard during the course of this inquiry that Camila Batmanghelidjh boasted of a close relationship with Government, specifically with Prime Ministers. What do you have to say about that sort of relationship between heads of charities and senior personalities within Government?
Sue Berelowitz: I think people should be very careful about the relationships that they cultivate and must be seen to be even-handed in the disbursement of Government funds. There is a huge competition for money, particularly these days, and it should not be that any particular charity can get additional funds on the basis of having a strong relationship with somebody in a position of power. That is why there should be a code of conduct. There needs to be a degree of objectivity and distance between chief executives and chairs of charities and Government so that everybody can see that due process has been followed and indeed that others aren’t swayed from talking about any concerns they may have because of the appearance at the very least of a very, very close relationship.
Q548 Chair: Well, you have been very, very helpful to us today. Thank you very much indeed. If there is anything that you feel you have not had time to say, do just put it down in writing and if you want us to publish that too we will be delighted to do so.
Sue Berelowitz: Thank you.
Chair: Thank you very much indeed.
Sue Berelowitz: Thank you very much.
Oral evidence: Whitehall’s relationship with Kids Company, HC 433 21