Written evidence from ALAN YENTOB, Chair of the Trustees, Kids Company (KCI 02)

Inquiry into the closure of Kids Company and the role of the Cabinet Office in its closure.

This document is a brief response to the terms of reference for the forthcoming inquiry. It covers only the matters relating to the scope of the inquiry and includes context setting details where it is appropriate to aid understanding of the situation.

Terms of Reference

The extent of the Government’s relationship with Kids Company, including the appropriateness of the level of Government funding distributed to the charity.

• From 2003 onwards, both under Labour and the Coalition, Kids Company received a direct government grant. Over the entire period the grant represented about 22% of Kids Company’s funding. The rest came from the public, corporates and philanthropists. There were also tens of thousands of individual donors annually.

• It was apparent from the very beginning that Kids Company did not fit the statutory commissioning model. It was for this reason that the Labour Government decided to grant funds directly to the organisation. As will be made clear further in this document, throughout this period there was continuous scrutiny and evaluation of Kids Company’s financial and clinical efficacy. Under the Coalition Government, external evaluators were commissioned to validate Kids Company’s outputs in respect of the government grant every quarter. These were all approved and indeed each quarterly payment was conditional upon satisfactory reports. There was also an independent audit commissioned by government for the end of each year.1 The audit reports for all the years from 2008 to 2013 inclusive were unqualified. The final

1 See Appendix A. Kids Company Audited Accounts Review and other factual comments. October 2015

audit for 2013 was completed in September 2014. They were the last completed accounts before insolvency.

• Kids Company had identified and was working with particularly vulnerable and high risk groups of young people. The level of government funding was commensurate with their needs.
• In respect of the grant from the Department for Education (DfE) ending in 2013, Professor Martin Knapp, a leading health economist, policy analyst and government advisor, found in his economic impact analysis that Kids Company produced a total net benefit to the taxpayer of at least £8.767m.
• There was an ongoing dialogue, at the highest levels of government, about how Kids Company could fit into the statutory model and receive funding at the local authority level. It was a grave disappointment to the management and Trustees of Kids Company that this did not materialise, despite recognition on the part of government that this should happen. Steps were taken in 2011 to facilitate this with the secondment of two senior civil servants, with the brief to transition Kids Company into statutory local authority funding streams. Over a 13 month period, 82 applications for funding were made, and all failed. The two civil servants were physically located within Kids Company for the entire period.
• Kids Company did not just come under the scrutiny of government. Numerous external organisations evaluated Kids Company’s work from many different perspectives. The majority of these evaluations evidenced the severity of the needs of the children, young people and vulnerable adults who accessed Kids Company’s services. They documented the innovative model developed by Kids Company as well as the characteristics of the children and young people facing adversity.
• Reports were published by, amongst others:
• Queen Mary’s University of London
•                 The London School of Economics
•                 University of Reading
•                 The Royal Society of Medicine
•                 The Anna Freud Centre
•                 University of East Anglia
•                 The Tavistock and Portman NHS Trust
•                 University College London
•                 Kings College London, The Institute of Psychiatry
•                 University of Cambridge, Medical School, Developmental Psychiatry
•                 KPMG
•                 University of Bristol

• Prompted by Kids Company, in June 2014 The Centre for Social Justice (CSJ), published a landmark report documenting the failure and breakdown of the current statutory children’s social care and mental health service. The report was entitled Enough is Enough.2

To quote from its findings:

Two years of research, over 70 interviews, many weeks of legal advice, and, most importantly, the experiences and views of some extremely vulnerable children and young people have gone into its making.

At the centre of this work has been a detailed analysis of the cases of 20 vulnerable children and young people who have been supported by Kids Company. These provide a window on to the horrific challenges they have endured and the multiple barriers to statutory services that they have often faced.

We must not shy away from the painful truths revealed by this report.

2 Appendix B. Enough is Enough: A report on child protection and mental health services for children and young people. The Centre for Social Justice. June 2014

• The disturbing findings of this report prompted the establishment of a campaign See the Child: Change the System. The campaign’s objective was to redesign the delivery of these services. An independent Children’s Task Force was established to achieve this. Members of the task force included:

Sir Keir Starmer, KCB, QC - Chair

Former Director of Public Prosecutions and former Head of the Crown Prosecution Service.

Lisa Harker

Director of Strategy, NSPCC and former co-director of the Institute for Public Policy Research.

Dr Maggie Atkinson

Former Children’s Commissioner for England.

Javed Khan

CEO of Barnardo’s.

Dr Rowan Williams

Former Archbishop of Canterbury and currently Master of Magdalene College Cambridge.

Professor Peter Fonagy

Freud Memorial Professor of Psychoanalysis, University College London and CEO of the Anna Freud Centre.

Lord Adebowale, CBE

CEO of Turning Point and former CEO of Centrepoint.

The competitiveness of the process by which Government financial support was given to Kids Company and whether the charity benefited from an unfair advantage in the level of Government support it attracted.

• All grants to Kids Company awarded between 2003 and 2013 were given following competitive tenders.

• Our three-year grant under the Labour Government from April 2008 until March 2011 was awarded by the Department of Children, Schools and Families as part of the Youth Sector Development Fund, following a competitive tendering process. This was subject to a ‘fairness appraisal panel’ to ensure probity and fairness of the grant giving.
• For the period 2011 to 2013 the DfE launched the Improving Outcomes for Children, Young People and Families Fund to which we successfully applied.
• After 2013, Kids Company’s relationship with government moved from the DfE and came under the auspices of the Cabinet Office. Further grants were also part of a competitive tendering process to ‘strengthen the voluntary sector’.

The advice given by civil servants to Government ministers on continued financial support for Kids Company, including the audit undertaken by the Cabinet Office and the Permanent Secretary’s request for ‘ministerial direction’.

• We were not party to internal government discussions, however the PKF Littlejohn audit undertaken on behalf of the Cabinet Office in March 2014 validated Kids Company’s governance, management and operational systems. The PKF representative stated:

I reviewed the process at board level, and was pleased to see that Kids Company’s processes are better than most organisations I see. I will be using Kids Company as a case study in a presentation I am giving next week (w/c 10th Feb) on governance.

It was acknowledged by the Trustees and documented by PKF that the one area of continuing concern was the unpredictability of cash flow. As Appendix A states, each year in a supplementary note to the report and accounts entitled Going Concern, Trustees made clear that the charity depended on its ability to secure new funding

each year. The supplement clearly highlighted that there was a strain on the company’s cash flow.

• From July 2014 to July 2015 there were numerous meetings, conversations and communications between the CEO, Chair and Trustees of Kids Company with civil servants, government officials, relevant Ministers and the Prime Minister to discuss the funding and future of Kids Company.

The seriousness with which ministers regarded Civil Service advice on its continued support for Kids Company.

• This question is for the relevant ministers and civil servants to respond to.

The financial management of Kids Company, in particular its failure, despite repeated concerns, to build up sufficient reserves.

• Kids Company Trustees wanted to build reserves, but due to the serious problems faced by our clients and the growing demand for our services it was extremely difficult. Our key fundraisers recognised the problems facing other charities in attracting funds while holding back cash reserves.
• The Trustees decided it would be more practical to persuade some donors to donate property that could then be put on our balance sheet as an asset. It would then be considered a reserve.
• The Morgan Stanley building was the first we secured. This became a Kids Company property over the course of the next few years. It was our intention to try and persuade other donors who owned property used by Kids Company to do the same.
• The subject of reserves was always a key agenda item at Trustee meetings and at the time of the annual audit. The Trustees were very conscious of the challenge facing

the charity in this regard, as were our auditors. While recognising the risk, we judged that the funds were badly needed for the increasing demands of the children and young people in our care.

• Pressure was mounting at the time of Kids Company’s last available audited accounts for 2013, which were signed on 30 September 2014, when the challenges facing the charity were significant. Page 43 of the 2013 Annual Report and Accounts3 points out:

Kids Company faces financial risks, including the need for having sufficient reserves….Our business model is to spend money according to need, which is consistently growing. We aspire to build up our reserves when circumstances allow…

These concerns around sustainability were communicated to the Prime Minister and government officials at the time, in a series of meetings and correspondence.

The consistency of the CEO’s ability to attract significant private donations, even during the recession years, appears to have led the Government to believe that the organisation was in a stronger financial position than was the case. While Kids Company almost doubled its income from corporates, the public, foundations and philanthropists the Government’s contribution did not increase, despite our persistent appeals and regular warnings about long-term sustainability.

• The growth of Kids Company was driven by increasing levels of need which were not being addressed by statutory services (for example, see Ofsted report 2013-144 and the CSJ’s Enough is Enough report (Appendix B)). As a consequence, Kids Company had no option but to over-rely on repeated donations from the private sector. This came to a head in the summer of 2014 when the dialogue with the Government

3 Appendix C. Kids Company Annual Report & Accounts, Year Ending 31 December 2013

4 Appendix D. The report of Her Majesty’s Chief Inspector of Education, Children’s Services and Skills 2013-14: Social care. Ofsted

began in earnest about sustainability if Kids Company was obliged to continue to rely on funds of private donors as its principal source level of private funding.

• A continuing dialogue between Kids Company, the Prime Minister and government Ministers began soon after the Coalition took office. Despite the failure of the two civil servants instructed in 2011 to secure a greater level of statutory funding for Kids Company, the PM wrote again to the CEO in January 2014. I quote here (in confidence to members of the Committee) from that correspondence:

I have always admired the work of Kids Company and the two reports you sent to me reinforce my belief in the importance of supporting the most vulnerable children and young people in our country….

I have asked Nick Hurd to work with Kids Company to enable you to achieve a sustainable financial footing, and Nick and his team in the Cabinet Office are looking forward to working with you as we pursue our common goals.

The same level of funding was eventually made available via the Cabinet Office for 2014. Any further commitment was the subject of frequent communication (see above) with government officials, and it was made clear that both the demands for our services were increasing and the pressures on fundraising were growing.

• Following publication of the CSJ’s report (Appendix B) emphasising the need for statutory funding, in July 2014 Camila Batmanghelidjh and Francesca Robinson, a Trustee and member of the Finance Committee, had an encouraging meeting with Oliver Letwin to discuss the need for funding. In response, Camila wrote to Mr Letwin on 14 July 2014 thanking him for acknowledging the need to access £20m of funding in order for Kids Company to be sustainable. She says:

I appreciate that the creation of this fund, for which there will be a competitive tender, will take time to formulate. As you suggested, it would be created either alongside or through the Troubled Families budget.

• After the meeting with Oliver Letwin, the challenges of fundraising continued. Both The Sunday Times and Evening Standard ran a story suggesting that the demand on private donors and philanthropic foundations was becoming a strain and was not sustainable. The headline in the Evening Standard on 22 September was ‘Camila Batmanghelidjh’s Kids Company charity will close by the end of the year without further Government funding’. This had a direct impact on our ability to fund raise and rebuild reserve.
• A month later, Camila wrote to the Prime Minister and Chancellor of the Exchequer, saying:

I have already spoken to Oliver Letwin who says that he is trying to find us money, but our lack of confirmed funding is leading to questioning by the media and anxiety by funders who don’t want to invest in an organisation they believe will not last beyond Christmas. My trustees have got legal responsibility and they will want to issue redundancy notices to the 600 staff who work with us.

• Two months later, on 22 December 2014, having had no proposal or response, the Chair and the Deputy Chair went to Downing Street to meet with Oliver Letwin and other government officials. It soon became apparent that the Government had not been able to secure any further funding for Kids Company. In addition, Oliver Letwin broke the news that the Government would no longer continue to provide a direct grant and that 2015 would be the final year in which this would be possible. If the Conservative Party were to return to office, he offered to do whatever was possible to once again attempt to explore possibilities through the statutory route. Nothing though could be guaranteed. He referred to the Troubled Families fund, run by Louise Casey, and the possibility of once again attempting to fund the Urban Academy as a free school through the DfE. There was also the suggestion that mental health funding could be accessed.

• As the organisation had been struggling to sustain itself while these discussions were ongoing the challenge facing the charity was considerable.
• We agreed to meet after the Christmas holiday and come up with a survival plan, to ensure the continuation of Kids Company. Oliver Letwin agreed to attempt to secure the 2015 funding upfront, to sustain the organisation over the next six months.
• The £4.25m was finally secured in April 2015, after extensive negotiations, reviews of accounts and cost saving proposals.
• After the election in May, the government held to their position and offered no further direct funding, and Kids Company began the process of downsizing.
• It was only when the proposal was presented to the Cabinet Office of a radical restructure, the appointment of a new Chair and four new Trustees that discussions began about a possible rescue plan. The downsizing proposal would see Kids Company contract from a £24.4m budget to one of £10m. Only £3m of this sum would come from government; £3m+ would come from a group of philanthropists who were long-term supporters, and the remaining £3m+ would come from pledges and secured donations which Kids Company would have to verify. Going forward, the new organisation anticipated being able to raise funds of £10m, a view supported by the major philanthropists joining the Board. Over a number of weeks Cabinet Office officials thoroughly reviewed and interrogated all Kids Company’s pipeline income and it was only when fully assured that these funds would materialise that they would agree to go ahead.
• The Chair and Trustees were determined to act responsibly through a period when the prospect of insolvency should no agreement be reached with Government was a real possibility. We had moved out of our offices in Southwark and were accommodated with great generosity by Deutsche Bank, who had always been big supporters of Kids Company.

• We approached leading specialists in insolvency law, Hogan Lovells, who agreed to work closely with the Trustees on a pro bono basis to ensure that we acted with due diligence throughout this period of uncertainty.
• We also approached KPMG, who agreed to act collaboratively and pro bono in conjunction with Hogan Lovells and the Trustees.
• There were daily communications between Hogan Lovells, KPMG and the Trustees for a period ranging from 21 May to mid-August 2015. There were numerous telephone conversations, meetings and email exchanges. To highlight the seriousness with which we embarked on this process, there were over 400 emails between the Chair/Deputy Chair and the partner at Hogan Lovells.
• Historically, all expenditure over £5,000 had to be approved by the Deputy Chair and a limit on expenditure was fixed. From the beginning of June 2015, all expenditure had to be approved by the Trustees.
• Because of a leak to media outlets of this agreement with the Cabinet Office there then followed considerable speculation in the press and other media, which delayed settlement for some time and required Kids Company to find another significant sum to enable it to continue operations in the meantime.
• After the intervention of the Charity Commission (see below) agreement was finally reached with the Cabinet Office and Oliver Letwin on 28 July to place the restructuring grant in Kids Company’s account. Payment was made on 30 July and the payroll of approximately £880,000 paid. We informed the Cabinet Office that some of the money would be required for this purpose.
• Within hours of the Government’s deposit, Kids Company was contacted by the Metropolitan Police, which had been approached by media journalists with allegations of sexual misconduct on Kids Company premises. The Met was obliged to announce that it would investigate. It is worth noting that in 19 years no serious allegations of misconduct against Kids Company had ever been made.

•                  The Trustees believed that in these circumstances it would not be possible to honour the agreement with the government or the philanthropists. The £2.1m unspent of government money was immediately ring-fenced. The philanthropists’ money was not drawn on, and the Trustees called in the Official Receiver and declared insolvency on 5 August. This decision to finally declare insolvency was taken with a heavy   heart, in close consultation with Hogan Lovells and KPMG.

The oversight role of the Charity Commission

•                  Kids Company submitted its annual report and accounts to the Charity Commission every year. They were always accepted and approved.

•                  Early in 2014, a donor made defamatory allegations against Kids Company and these were published in The Spectator magazine. The allegations were found by the Charity Commission to have no substance.
•                  In June 2015 the Charity Commission was approached with new allegations from former members of Kids Company staff, some of which had already been aired in the media. (There is an ongoing investigation by the Metropolitan Police into the theft of personal data concerning Kids Company clients which were passed on to some parts of the media.) The Charity Commission communicated these allegations to the Cabinet Office and to Kids Company Trustees.
•                  At the suggestion of the Charity Commission, these charges were swiftly investigated by PWC. Their preliminary report of 26 July 2015 could find no evidence to support the four of the seven charges that had been investigated. It was agreed that the three remaining ones would be investigated at a later date by PWC.

• The PWC report was communicated to the Cabinet Office and consequently the £3m contribution to the proposed restructure of Kids Company was approved. As we know, this was the moment when the allegations of sexual misconduct were passed on by Buzzfeed and Newsnight to the Metropolitan Police, leading to the declaration of insolvency.

Subsequent to the closure of Kids Company, the Charity Commission has announced that it will be conducting an inquiry into its closure and the events leading up to it.

October 2015

APPENDIX A

Kids Company Audited Accounts Review and other factual comments 8 September 2015

Statutory Accounts for 2008 to 2013 inclusive General Comments

Save for a small loss in 2009 of £276,415, the charity recorded a surplus in all of the financial years from 2008 to 2013 inclusive:

• Its net assets since 2009 increased from £17,081 to £1,723,487 at 31 December 2013.
• At 31 December 2013 net assets were 7.5% of income. The growth in net assets was helped by:
• a large surplus of £1,333,051 in 2012, and
• the donation by a major banking group in 2012 of a property, the Heartyard, which was refurbished and came into operation in early 2013.

Even after excluding fixed assets, the charity still had net current assets at 31 December 2013, of £434,282.

The audit reports for all of these years were unqualified.

The 2013 accounts are the last available audited accounts and were signed on 30 September 2014.

Cash flow

Whilst the charity made an audited surplus in all but one of the six years, the biggest challenge was coping with the timing of cash flows and the seasonality of fundraising income. Whilst revenues covered costs over a full year, the timing of cash donations caused much strain, particularly in the summer months. The demands on cash were great. The charity got through seasonal times of cash flow pressure by managing its working capital and using short term loans.

Every year, in a note to the accounts headed “Going Concern”, the trustees pointed out that the charity depended on its ability to secure new funding every year. The note highlighted clearly the “strain on the company’s cash flow”.

Income

Income from 2008 to 2013 grew from £11.2m to £23.1m:

• The major growth was in donations, which more than doubled from £7.7m to £14.8m over the period.
• Significant growth was also generated from corporate activities and the activities of Kidsco Enterprises, increasing fivefold from £395,838 to £2,131,088 over the period.
• Funding from Government and local authorities remained relatively flat through this period, increasing from £3.7 million in 2008 to £4.4 million in 2009, and then staying at that level until reaching £4.7 million in 2013.

By 2013 the proportion of turnover funded by government and local authorities had shrunk from 33% in 2008 to 23% in 2013.So the growth in turnover was achieved not through government funding but through fundraising and other activities.

Expenses

Expenses in the period grew from £11 million to £23 million:

• This reflects the increased headcount required to meet the service provision. The average weekly number of employees involved in providing services increased from 167 FTE’s in 2008 to 476.3 FTE’s in 2013.
• There was a 30% increase in fundraising staff costs over the period, during which the numbers involved in fundraising doubled from  9 FTE’s  to 18.4 FTE’s.
• Throughout the period between 94% and 96% of all staff were involved in service provision.

No employee was paid more than £100,000 over this period. Only two were paid more than £70,000.

No trustees were paid in the period. Donations in cash/kind from trustees averaged £68,690 in the period, a total of approximately £412,000. The trustees also made a number of loans to the charity, some of which are outstanding-I do not have full details.

Specific points arising from the accounts: 2013

These were signed on 30 September 2014, so are the latest available accounts for use by donors etc.

• In the Letter from the Chief Executive on page 8 of the accounts CB states that: “…in 18 years we have not received any local authority funding for the social care or mental health services we deliver. To address this gap in funding, central government initially gave us a grant of £4 million, and then a further £500,000 as a result of our campaigning. This funding

represents 20% of our income, with the other 80% coming from over 75,000 different sources each year. This grant runs out in March 2015. We are, therefore, campaigning to get further and more robust funding. We are very grateful to the government, who have been incredibly understanding, and have acknowledged that Kids Company serves a uniquely disadvantaged group of children and young people. The government has pledged to identify structures through which we could get more sustainable income.”

• Note 22 (Related parties) gives full disclosure of the employment of two children of a trustee.
• Note 23 (Going Concern) states the following: “As the charity has no endowed funds, the level of activities in the financial year starting 1 January 2014 will depend almost entirely on its ability to secure continuing grant income. Whilst significant grants have been awarded, the organisation continues to grow very fast, and has low reserves relative to its size. The Charity’s history of delivering the maximum possible charitable objectives with the resources available has often put a strain on the Charity’s cash flow. The Trustees are confident sufficient funding will be secured and are monitoring the situation. The Trustees consider that debts will continue to be paid as they fall due. “A similar note is included in all other years.
• Page 43 (Risk review) points out that “Kids Company faces financial risks, including the need for having sufficient reserves, and balancing fixed costs against the security of its incomes.

Our business model is to spend money according to need, which is constantly growing. We aspire to build up our reserves when circumstances allow. Kids Company has a dedicated fundraising team”.

2012

• Page 13(Why we are needed) states that “We stay with our young people into their early thirties, and longer if they continue to have special needs”
• Page 16 (A Snapshot), says that the “Get Legit” programme comprises “immigration, criminal justice, legal documentation etc.”
• Page 35. (Financial and Business review) says: “2012 saw an increase in demand for Kids Company services which has led to a 24% increase in expenditure on frontline service delivery. We are delighted to say that through the efforts of our Chief Executive and continued support of the public we have increased our income to support this expenditure which has allowed us to build a modest free reserve”.

2010

• Second paragraph of CEO’s Message (page 3) refers to the YSDF grant and says “Through their audit Kids Company was identified as having robust clinical and financial structures”
• Pge 21 (Reserves Policy Note) states: “At the end of the year Kid’s Company’s free reserves were in deficit by £32,464. The Charity has a target of building up reserves equivalent to three months’ running costs. Morgan Stanley has chosen Kids Company as its charity of the year, which should allow us in 2011 to have a wholly owned asset. In calculating the free reserves the Trustees have excluded restricted reserves and the designated fund that represents fixed assets.”

Other relevant points

1.       Monthly management accounts were produced on a regular basis, usually within six weeks of the month end.

2.       Clean audit reports every year from reputable audit firms, latterly Kingston Smith LLP, who specialised in the charity sector.