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Firms criticised by MPs over failure to report ‘scale of risk’ carried by Kids Company

THREE accountancy firms have been criticised by MPs for failing to report the scale of risk carried by charity Kids Company prior to its collapse into adminsitration last year

MPs in the Public Administration and Constitutional Affairs Committee found that PwC, PKF Littlejohn and Kingston Smith – who all undertook work relating to the charity – each failed to report the scale of risk carried by Kids Company to the charity’s trustees, the Cabinet Office or Charity Commission.

According to the report, the charity’s trustees repeatedly ignored clear warnings from Kingston Smith, Kids Company’s official auditors from 2011, about its finances. However, the report found “a striking contrast” between the language used by Kingston Smith and preceeding auditors MacIntyre Hudson, in management letters to Trustees.

MacIntyre Hudson called Kids Company’s “history of spending over budget… a very risky strategy,” and warned that the “deficit in free reserves currently puts the charity in a potentially insolvent position.”

When Kingston Smith took over as auditors, the charity’s free reserves were still in deficit (-£10,125 in 2011, compared with -£32,464 in 2010) but Kingston Smith’s management letters warned instead of “an impact on Kids Company sustainability…negative publicity and reputational damage” rather than insolvency.

Nick Brooks, the partner responsible for the audit, explained that this was simply a case of “different firm, different language,”and stated that Kingston Smith “probably agreed” with MacIntyre Hudson’s assessment that Kids Company’s business model put them at risk of insolvency.

“Nothing had changed…it has always been living on a knife edge, which is in my view portrayed quite clearly through the notes to the accounts,” he said in oral evidence to the committee.

However, MPs said the firm “offered no credible explanation for changing the warnings of insolvency from those issued by the preceding auditors”.

“It is surprising that Kingston Smith did not consider its duty to alert the
Charity Commission to the extremely high risk of failure in this charity, in accordance with its duty as charity auditors,” the report said.

In July last year, PwC was commissioned to investigate allegations about financial practices at the charity. The work undertaken by the Big Four firm was “very limited in nature” and far removed from the nature of an audit. Consequently, PwC’s preliminary report was of “little value to Kids Company, the Charity Commission or the Cabinet Office”.

“Although investigation into one allegation had been completed, the remaining reports were subject to such heavy caveats in consequence of the very short timeframe that no conclusions could be drawn,” the report said. 

In December 2013, PKF Littlejohn was engaged by the Cabinet Office to review the financial and governance controls of Kids Company because it was “nervous about the charity’s financial controls and governance”. Once again the scope of the review was fairly narrow and were limited to assessing the appropriateness of Kids Company’s procedures and controls. 

“It is not acceptable that a report commissioned to provide a professional assessment of a charity’s governance and controls looked only at systems and processes,” the report said, 

“This is a salutary warning about the use of professional advisers. They are no substitute for the exercise of judgement. They tend to limit the scope of the terms of their investigation in order to limit their own exposure to risk,” it concluded.  

“In this case, they were able to avoid making any examination of the wider issues that threatened the charity’s existence. In the partial assurances they offered, the resulting reports may actually have obscured more than they revealed to those who read them.”

Ultimate responsibility for the charity’s failure, the report found, lies in its “negligent” trustees, although it added that government and regulators must also learn lessons from its failure. Each time the charity’s accounts were signed off as a going concern, the auditors issued significant warnings to the charity about the precariousness of its demand-led operating model and the dependency of the charity upon future grants and emergency funding.

“However opaque the language, the meaning should have been clear enough to the trustees and CEO. Such repeated warnings should have led to a change to the reserves policy, contingency planning for insolvency and substantial downsizing many years before the final crisis.”

 

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