MPs have criticised auditors PwC, PKF Littlejohn and Kingston Smith for not scrutinising Kids Company properly and missing key indicators during their dealings with the charity before it folded.

Partners from the three firms appeared before the Public Administration and Constitutional Affairs Committee this morning to give evidence to an inquiry into the relationship between Whitehall and the collapsed charity Kids Company.

PwC had been appointed by the charity in the summer, at the insistence of the Charity Commission, to look into serious allegations made against the charity. PKF Littlejohn carried out a report in 2014 into the charity’s governance and financial controls for the Cabinet Office. Kingston Smith has audited the charity’s accounts for the past few years.

Bernard Jenkin MP, chair of the committee, said Kids Company operated a “high risk model” of committing almost all its funding to helping its clients and that “the auditors missed this fundamental risk” which should have been “taken more seriously”.

“I am not going to say that this is an Enron moment,” he said, “but there has been a collective passing of the buck which I am rather uncomfortable with.”

When asked if Kingston Smith had come close to refusing to sign off the accounts for Kids Company, Nick Brooks, partner at the firm, said that he thought that point would come for the 2014 set of accounts, but the charity collapsed before it got to that point.

He said in 2011 he had not reported the charity to the Charity Commission, even though it did not respond to the auditors’ letter with a number of recommendations. He said it was “not unusual” for charities to fail to respond to auditors' recommendations.

Brooks said he was aware that the charity was “unorthodox” but that when Kingston Smith queried payments in the samples it audited there was always an explanation. He said he thought Kingston Smith could “add value” when they took Kids Company on as a client.

Paul Flynn MP, said that by signing off the accounts Kingston Smith’s work had been “used to continue abuse” of government funds, which resulted in young people being “badly let down”.

Brooks said that it was not for auditors to make “moral judgements”.

Jenkin told Alastair Duke, partner at PKF Littlejohn, that his firm had been “conducting your review with your eyes wired shut”.

Duke said that his firm and the Cabinet Office had a “clear understanding of the work from the outset” which was to examine the governance and financial systems at the charity, and that its report “highlighted cash flow and level of reserves as a problem”.

Will Richardson, partner at PwC, stressed that the report his firm had produced was an interim report based on three days’ work.

He told the committee that he was not aware that the charity planned to present the report to the Cabinet Office as part of a bid for more funding.

Jenkin questioned the effectiveness of PwC's scrutiny.

"This piece of work wasn't worth very much, was it?" he said.

Kingston Smith: Cabinet Office claim 'untrue'

The Public Accounts Committee has also conducted an investigation into Kids Company and when it questioned the former permanent secretary to the Cabinet Office, Richard Heaton, he said that the Cabinet Office had been in discussion with the charity’s external auditors prior to making one of the final payments to the charity.

Brooks told the committee that Heaton’s claim was “untrue” and that Kingston Smith had not been in contact with the Cabinet Office.

Jenkin said the committee “will have to address that”.