Kirsty Weakley examines Kids Company’s annual accounts to identify clues about what led to its downfall.

In early August the high-profile charity Kids Company spectacularly collapsed.

The charity’s founder and chief executive Camila Batmanghelidjh quickly blamed “rumourmongering civil servants, ill-spirited ministers and the media” for the charity’s downfall, which came after philanthropists backed out of a rescue plan when it emerged the police were investigating claims of unreported sexual abuse.

The Official Receiver is currently in the process of winding up the charity. The Charity Commission has opened a statutory inquiry and the Public Administration and Constitutional Affairs Select Committee has said it will take evidence later this month about successive governments’ funding of Kids Company and the Charity Commission’s oversight.

The National Audit Office has also announced an inquiry into government funding of the charity and will publish a report later this autumn.

In the chief executive’s report in the most recent set of the charity’s audited accounts for the year to 31 December 2013, Batmanghelidjh said: “Kids Company is determined to remain a safety net and a source of hope for its children, so our survival is nonnegotiable. See you next year.”

So what went so badly wrong? And can Kids Company’s accounts shed any light on what happened?

 

What did the accounts say?

The charity had been operating for 19 years. During that period, its annual reports and accounts were often as colourful as Batmanghelidjh’s outfits, with lengthy sections on why the charity was needed, artwork and poetry from young people, and a detailed history of the charity – before the reader ever got to any information about what had happened in the past year. For instance, in 2013, six pages were devoted to thanking a range of high-profile supporters, including Coldplay.

While all annual reports include details about a charity’s projects and achievements from the past year, there are instances over the years in the case of Kids Company where whole sections appear to have been cut and pasted from previous reports.

In 2006 and 2007 both reports included the sad news that: “One of our young people was shot dead randomly whilst walking on the streets. He had been with Kids Company for ten years and was not involved in criminal activity or gangs.” It seems highly unlikely that the same tragedy would occur two years running, at least not without the trustees’ report noting the fact.

 

Unrestricted funds

Over the last ten years £90m of the charity's £116m total cumulative income was unrestricted – ie 78 per cent. And the percentage of its income that was unrestricted each year only dipped below 50 per cent once, in 2005, and peaked at 90 per cent in 2011 (figure 3).

 

But instead of building reserves Kids Company spent almost every penny it had. Considering the size that the charity was when it imploded two months ago, it is hard to avoid the conclusion that this was, at best, a naïve and irresponsible attitude to financial management.

In its most recent audited accounts, for the year ending 31 December 2013, £15.7m of the charity’s £23.1m total income was unrestricted, but its free reserves stood at only £434,000 at the end of the year – less than a week's expenditure, but still the highest level ever reported in its accounts (figure 3).

 

It should therefore have been clear, from even the most cursory review of the charity’s balance sheet, that it would be unable to cope with any sizeable disruption in its cashflow.

A report last year for the Cabinet Office, prepared by accountants PKF Littlejohn, suggested that lack of cash was the biggest danger to the charity. “It is clear from our work that the main financial risk to the organisation is cashflow,” the report concludes.

“A significant amount of management and finance time is spent in assessing and managing the cash position. Without improving the cash position of the charity it is not possible to build reserves and invest in new activities and locations.”

Reserves crisis

Unrestricted, or ‘free’, reserves are the funds a charity has set aside that can be drawn on in an emergency. Most charities which have low reserves are forced into this position because they have small margins on contracts, because their income is restricted to certain projects, or because overall income is falling. But this was not the case at Kids Company.

In 2003 the charity reported a free reserves deficit of nearly £500,000. In those accounts trustees said they aimed to build up reserves to a level equivalent to six months' expenditure. The trustees' report for that year said that they “have agreed a long-term policy whereby unrestricted funds not committed for a specific purpose should be maintained at a minimum of six months of annual resources expended.”

But despite that policy commitment, in six of the past ten years Kids Company went on to report a deficit on its unrestricted reserves (figure 4). The inability to build up reserves appears to stem from Kids Company’s principle that no child that came looking for help should be turned away, and not, as Batmanghelidjh recently claimed, that almost all the charity’s income arrived in the form of restricted grants.

In an interview with our sister title Civil Society News, shortly before the charity’s closure, she said that the organisation was unable to build up reserves because most of its income was restricted and the charity faced escalating demand during the recession.

“We’ve wanted to build reserves but we’ve never had additional money for it,” Batmanghelidjh told us. “Our growth is quite misleading. People have given us money and wanted something for it. We’ve never had free money. Also, we’ve never had money we can set aside for reserves because of the sheer demand.”

It is widely accepted that there is no standard best-practice level at which reserves should be set as it depends on the charity’s individual circumstances. However, many charities set reserves at between three and six months’ expenditure, depending on the nature of their activities. By 2013, three months’ reserves at Kids Company would have been £5.7m and six months’ would have been £11.5m.

In 2013 the charity’s annual report said: “Each year the trustees review the policy for maintaining free reserves, taking into account the major risks faced by the charity.” They confirmed that they were “happy” to have “been able to maintain the charity’s free reserves position”

Whose responsibility was it?

All trustees are collectively responsible for setting and enforcing a charity’s reserves policy. Between 2006 and 2013 Kids Company grew from being an organisation with an annual income of £4.9m and a staff headcount of 80 to a very large charity with an income of £23m and 500 staff. Yet during this whole period there was little visible change to the structure of the trustee board: 

Alan Yentob, chair since 2003
Richard Handover, vice-chair since 2005
Erica Bolton, since 2005
Francesca Robinson, since 2006
Sunetra Atkinson, since 2006
Jane Tyler, since 2007
Andrew Webster, since 2013

The latest set of published accounts state that the charity’s board should be at least five-strong but no bigger than ten. At the point of its collapse there were seven trustees listed on the organisation’s website. Alan Yentob, creative director at the BBC, has chaired the charity since 2003 and Richard Handover, former chief executive of WH Smith, has been vice-chair since 2005.

Before this summer’s trouble began, the most recent addition to the board had been Andrew Webster, who joined in 2013. All the other six trustees had been on the board for between eight and 12 years. Just days before the charity collapsed it augmented its board with the addition of four long-time supporters: Stuart Roden, John Frieda, William de Winton and Nick Lawson.

With her charismatic personality, Batmanghelidjh has always been the driving force behind Kids Company. But while she gave interviews to a range of national broadcasters and newspapers in the lead-up to and shortly after the collapse, trustees were noticeably quieter.

Was this a classic case of founder syndrome? Were the trustees doing enough to hold the chief executive and her management team to account?

It will take some time before the full Kids Company story emerges and, until then, we cannot be sure of the extent to which the failure of the charity can be laid at the door of any individual.

But it is a timely reminder – for everyone involved in running a charity – of the importance of ensuring that reserves are adequate and that trustee boards are well-resourced and holding their executives to account.

Kirsty Weakley is deputy news editor at Civil Society News.