Oral evidence: Whitehall’s relationship with Kids Company, HC 433Tuesday 17 November 2015
Oral evidence, 17 November 2015.
Witness
Alastair Duke, Partner, PKF Littlejohn, gave evidence.
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.
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.
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.
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.
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.
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.
Chair
Did you have any contact with Ministers?
Alastair Duke
No.
Chair
Or special advisers?
Alastair Duke
No, not that I am aware of.
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—
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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—
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.
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.
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.
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.
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—
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?
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.
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.
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.
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.
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.
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.
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.
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.
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—
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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—
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.
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.
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.
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—
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.
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.
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.
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.
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.
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.
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.
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.
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.
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—
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—
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.
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—
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.
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.
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.
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
Tom Tugendhat
Where did he get this idea from?
Alastair Duke
That is a question to ask him.
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.
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—
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—
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—
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.
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—
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.
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.
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.
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.
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.
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—
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—
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Mr David Jones
School fees?
Nick Brooks
I do not recall ever seeing school fees in the sample that we took.
Mr David Jones
There were large sums of money paid for school fees.
Nick Brooks
Not in the sample that we looked at.
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.
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.
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”.
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.
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.
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.
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.
Paul Flynn
Did you ever visit Kids Company, say, on a Friday?
Nick Brooks
Yes.
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.
Paul Flynn
What were the sums in the envelopes?
Nick Brooks
I cannot tell you.
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.
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.
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.
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.
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.
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.
Paul Flynn
How do you choose your sample?
Nick Brooks
Statistically.
Paul Flynn
Explain.
Nick Brooks
It is done by a computer.
Paul Flynn
This is a random sample, is it?
Nick Brooks
Yes a random sample.
Paul Flynn
Is this reliable?
Nick Brooks
Yes, I believe so. I believe all other firms use that system.