Public Funding for the Third Sector: Learning the Lessons from Charity Failures

by Diana Melville, Governance Advisor, CIPFA

In the last two years there have been some high-profile failures in financial management and governance among charities. Such cases provide a dilemma for public bodies. On the one hand the third sector promises a route to supporting community groups, working in the public interest, or delivering services to the public whether it is through grant funding or contract arrangements. On the other hand public bodies have responsibilities for the stewardship of public funds and need confidence that funding will be used effectively.

The most significant governance and financial management failures are:

• In 2015 Kids Company was wound up as insolvent. The charity had received over £46m in public funding with grants being authorised despite concerns being raised that the funding was not value for money. The National Audit Office and the Public Administration and Constitutional Affairs Committee both published reports into what went wrong, with the latter concluding that "negligent financial management rendered the charity incapable of surviving any variance in its funding stream".
• In 2016 the children’s charity 4Children went into administration due to financial difficulties because of the loss of key contracts and funding pressures. This followed a period of rapid expansion, in part funded by private equity.
• In 2017 Broken Rainbow went into liquidation despite continuing to receive grant funding from the Home Office. The National Audit Office criticised the weak monitoring arrangements of the charity and the failure to spot its financial decline.
• Also in 2017 the National Hereditary Breast Cancer Helpline was given an official warning by the Charity Commission, using the new powers introduced in Section 75A of the Charities (Protection and Social Investment) Act 2016. The trustees were found to be failing to comply with their responsibility to manage and administer the charity. Decisions were not made collectively and properly recorded and there were concerns about financial management and sustainability, in particular a lack of appropriate financial controls.

Getting the balance right is hard for public bodies. Too little due diligence or oversight could mean they are criticised if the third sector body fails. Too much and they are criticised for imposing bureaucracy on volunteers and diverting charitable funds onto paperwork. Avoiding smaller third bodies as ‘too risky’ could mean that valuable opportunities for innovation or local delivery are lost.

Some of the difficulties that public bodies face themselves, such as uncertainty about their own financial position, may just make the position even more challenging. For example, a public body may opt for short-term contracts because it is uncertain about financial sustainability but this may create difficulties for the third sector in planning its own resources. The results can be sub-optimal for both the public body and the third sector and ultimately the charity’s beneficiaries.

Cracking these issues is not simple but it is vital to meet the governance and financial responsibilities of both the public and third sectors. If not, the UK charity sector will continue to remain at risk, with incidences of failure becoming more common and catastrophic. It would also open up new opportunities.