Kids Company: Ministers had report on charity's spending
Ministers were sent a report containing "gobsmacking" details about Kids Company only three days before paying it £3m.
The document confirmed large payments to individual clients and the family of staff and found incomplete financial records.
At the time, the charity said clinical need justified the spending.
Newsnight and BuzzFeed News have seen the report, which was commissioned by Kids Company.
The document confirms that one individual client received £47,069 in tax-free support in 2014 alone and the charity spent more than £50,000 funding someone described as the child of an Iranian diplomat, including their PhD study.
It notes that the two young people who have a relative working for a charity received support worth more than £130,000 and found several examples of unusual financial practice at the now-shut charity, which was led until it closed by its high-profile founder Camila Batmanghelidjh.
The 13-page report was written by PWC, the professional services company, at Kids Company's request after former employees approached the sector regulator, the Charity Commission, with 10 allegations about Kids Company earlier this year.
The document is an initial investigation into five of the 10 allegations with the remainder expected to be addressed subsequently. It revealed details described by a senior figure in the Cabinet Office as "fairly gobsmacking" and "horrifying and familiar" by one children's services expert, who spent time trying to evaluate the charity for the government.
Their interpretation appears to differ from oral testimony to the Commons Public Administration Select Committee given by Alan Yentob, chair of the charity's trustees and also the BBC's creative director.
He told MPs: "Because of the allegations going on, we had to go to PWC and pay them £50,000 to tell us that there was not much substance in the allegations and therefore the Cabinet Office should go ahead and give us the money."
The report was sent to the Cabinet Office on 27 July, three days before the £3m grant payment, signed off by ministers Matthew Hancock and Oliver Letwin, was made. This payment was made against the advice of civil servants, who said that Kids Company had failed to abide by the terms of a previous grant.
The charity also shut down within a week, but the fact that this document was known to the department will make it more contentious. The Cabinet Office told MPs that the payment to Kids Company was delayed while they awaited this document.
Senior figures in the Cabinet Office point out, however, that they gave money to the charity along with stringent conditions - including the replacement of Ms Batmanghelidjh - in an attempt to rectify the issues it raises. A spokesman for the charity's leadership said: "Kids Company was fully transparent and co-operative" and that the allegations examined in the report were "unsubstantiated".
John Podmore, a trustee at the Pilgrim Trust, an organisation who give grants to charities and which has previously cancelled grants to Kids Company over management concerns, said: "In the light of this report no-one in their right mind would sanction further funding, Rather, they would call a complete halt and demand answers as to where the previous funding went and on what basis."
Mr Letwin and Mr Hancock are due to appear before the House of Commons Public Administration Committee next month to explain their decisions.
The PWC report is brief and was completed in three days. It says: "We have not carried out anything in the nature of an audit." The document does not adjudicate on whether the complainant's concerns were fair, assess clients' needs nor make recommendations to the Cabinet Office. It does establish facts, based on analysis of the charity's records.
One allegation was that the relatives of staff members had enjoyed particular help. PWC said that two young people who both had a close relative working for the charity were registered as clients in 2014 and were beneficiaries of £6,460 and £2,382 respectively. Dating back to 2009, PWC found these two young people benefitted, between them, from a total of £134,293 of spending.
A total of £90,000 of the money was spent on therapy, but in reviewing 2014 spending PWC found a receipt for two pairs of designer shoes costing £305 and £49.95 respectively that year.
They also noted that "some of these payments [to these young people] were made from CB's weekly float. Where this was the case the supporting information was miscellaneous scraps of paper with the value, date and the beneficiary's name written on it. This manner of supporting evidence alone does not provide reliable evidence".
Ms Batmanghelidjh told PWC that this outlay was justified by her assessment of the young people's needs and it was not related to their relatives' work. In a statement, the charity said: "Because of the vulnerability of Kids Company's clients we cannot comment on individual cases."
A further allegation concerns large payments made to one adult client. PWC confirmed that Kids Company paid her £47,069.96 during 2014 split into 235 separate costs. This included £4,700 for clothes and £19,800 on rent.
This was raised with the Charity Commission because of concern about "employment irregularities". The complainants believed the client was actually an employee and should have been paying tax. If correct, this income would be equivalent to taxed earnings of £67,500. Other former staff have told BuzzFeed News and Newsnight that she was considered an employee.
Ms Batmanghelidjh denied this, telling PWC that this person was just a client who volunteered at the charity. That, however, raises questions about the generosity afforded to some clients.
During the select committee, Ms Batmanghelidjh was asked whether it was true that people over the age of 18 were receiving more than £100 a week. She replied: "That would be very rare and only if it was a family and they had to support a family."
This recipient has no family. But according to Ms Batmanghelidjh's comments to PWC, the spending was justified because of the client's traumatic background and her subsequent needs. PWC has not had time to verify this, nor Ms Batmanghelidjh's claim that HMRC told her that this income would not affect either this client's tax status nor her right to benefits.
The Iranian diplomat's child
The next allegation is that Kids Company funded the PhD of someone described in the report as the child of an Iranian diplomat while they were studying for a PhD at a high-ranking university. PWC identified that this support had been provided at a cost of £57,779, with £14,407 incurred in a single year. The latest support package was costed at £25,600 a year - and included course fees.
The charity's former leader, who has Iranian family, stated that she did not know the client's family and had not been involved in the case. But the young person found themselves without support and a donor was found to sponsor the spending. The issue raises a question, however, about why a youth work charity was sponsoring a foreign student.
Another allegation was that staff at the charity circumvented financial controls by splitting payments into small parts to avoid financial controls. A payment of more than £5,000 required trustee oversight. PWC found one example which might meet this description, but found no evidence of a broader problem.
In the course of analysing this allegation, PWC noted that when analysing £6,684 of payments for one beneficiary, they found £4,000 of spending had no receipts. They also note that spending on Christmas presents for clients was logged in January 14 and January 15.
In a statement, Kids Company said PWC's report did not find evidence to validate allegations made against the charity.
"The findings were also shared with the Cabinet Office prior to Kids Company's restructuring plans being agreed," the charity said.
"This was not a full audit but an intensive investigation looking at hundreds of documents and interviews with key staff. Kids Company was fully transparent and cooperative.
"Alan Yentob made it clear in his submission to the Public Accounts Select Committee that the PWC investigation was incomplete."
The charity said it provided a supportive family environment through financial and practical support, and that all the gifts referred to in the PWC report were funded by private donors.
PWC has declined to comment "on a confidential piece of client work". The Charity Commission, which has recently opened a statutory investigation into Kids Company, says it "cannot comment while our inquiry is under way".
The Cabinet Office has a policy of not commenting on leaked documents.