Auditing culture in the fourth sector
In light of events in the charity sector, good audits can encourage and maintain behaviour change in companies.
It was the collapse of high profile young people’s advocate Carmen Batmanghelidjh’s Kids Company which set the red lights blinking on the charity sector dashboard.
Kids Company was founded in 1996 to provide support for inner city youngsters. Batmanghelidjh had claimed fantastic results in turning round the lives of children who were being sucked into gangs, drugs and crime. And its charismatic founder in her colourful costumes and headdresses was a fixture on TV talk shows – and the corridors of power. Former Prime Minister David Cameron was a supporter.
But in 2015, a journalist uncovered serious financial irregularities including lumps of cash being handed out to troubled children with few if any controls. The expose was published just days after Cameron’s government had approved the injection of £3m into the charity. It took just weeks for the entire organisation to collapse.
In the fall out, questions were asked about the Charity Commission’s regulation of not just Kids Company but the fourth sector as a whole. The fiasco prompted soul-searching among the donors – including the government. And promoted a new focus on the strength of governance at charities with law firms and accountancy bodies drawn to think hard about whether the correct standards of audit were being applied.
But there was another factor with Kids Company. Even as a winding up petition was going through the High Court in August 2015, new allegations about the organisation were emerging. Sexual abuse of youngsters, drug-dealing and handing over wads of cash to children unaccountably.
In these revelations the seeds of a new crisis can be found.
A senior lawyer, formerly of a magic circle firm in London, who has advised charities for 20 years and sat as trustee on numerous philanthropic organisations says ‘At the time, Kids Company was perhaps seen as isolated. Certainly, when I was asked to be a trustee, I was more concerned about smaller and not so small bodies such as family foundations,’ he says, ‘I would be concerned about how family charities were used for tax benefits and the reputational risk there.’
‘At the same time as Kids Company, there was also a focus on the cost of fund raising – and the amount of money raised going to good works compared to salaries and payments to fund raising firms,‘ he adds, ‘but these are largely transparent problems and the risk or issue can be seen and managed.’
So a high profile collapse such as Kids Company might not trigger wider questions of ethical behaviour in major fourth sector organisations.
But a far larger scandal was quietly brewing. In February 2018, The Times splashed a story about Oxfam. Aid workers for Oxfam – one of the world’s largest charities – had been buying sex in Haiti in the aftermath of the earthquake which brought the country to its knees in 2010.
If Kids Company’s £3m government injection was big news, the scandal at Oxfam was massive. The charity employees 90,000 people around the world and last year received £176m from government and public bodies from a total income of £406m.
The initial scandal soon snowballed. The charity had been aware of accusations but had failed to properly inform the Charity Commission and had quietly let ringleaders and perpetrators go – often not raising any issue as they moved to other charities in similar roles.
It emerged that Oxfam’s investigation in 2011 led to four members of staff being dismissed yet three more – including a senior figure – were allowed to quietly resign.
More and more similar allegations not only about Oxfam but other charities emerged. Medecins Sans Frontiers was drawn into the scandal.
More recently allegations of sexual harassment by a top executive at Save the Children emerged, leading it to cease funding bids from government until it had put its house in order.
Former City journalist, now freelance journalist and consultant, Simon Watkins says the flood of accusations highlights a blinds spot.
'These kind of allegations have shocked people more than if they had been made about executives at commercial companies, because there is a tacit assumption that people working at charitable organisations are on a different moral plane. But just because the ultimate cause is noble, it does not follow that every action carried out by every individual is automatically beyond reproach.
‘Clearly what is needed is that the claims of the fourth sector be treated with the same questioning eye that would apply in the corporate world’.
Jos Simson, chief executive of City PR Tavistock, agrees – and says charities should draw a lesson from an unexpected direction – mining and resource extraction companies.
‘Mining companies working in frontier economies across Africa and other tough regions and jurisdictions historically have been challenged on their records. You don’t need to dig far for allegations of bribery and corruption,’ he says.
‘But CSR reporting, especially since the 2006 Companies Act, has produced a sea change. Perhaps once it was a box ticking exercise, then an annoying but necessary job. Now, the best companies whole-heartedly embrace robust, audited CSR reports.’
It is not so much that hard-bitten geologists have discovered their softer side, Simson explains. ‘A good CSR report is vital for modern investors. You can quite clearly see a flight to quality. When a company reveals a failing in its CSR, of course there is a focus on putting things right – but credit is given for self-reporting. Investors believe that if a company can be honest about uncomfortable social issues, it is more likely to be financially transparent and more likely to execute well on the ground.'
The lesson according to Watkins and Simson is that charities will find it hard to examine themselves with clear eyes and the solution lies in conducting robust audits of both finances and behaviours.
'If you bring in an unflinching auditor to assess and test what you are doing, it may initially be painful - but only in the way ripping an old plaster off is. Sunlight is the best antiseptic,' says Watkins.
Good audits also encourage and maintain behaviour change in companies. The process of examining any organisation's culture increases the chances of workers holding themselves to account.
But the process clearly has to start with audit – outcomes that get measured are the subject of focus.
Simon Fluendy – Researcher and writer