The U.K. arm of accounting firm Crowe LLP, its CEO, and a senior auditor settled charges with the Securities and Exchange Commission on Aug. 14 over various mistakes the firm made during its 2018 audit of music streaming company Akazoo.
Without admitting or denying the SEC’s findings, Crowe U.K. agreed to be censured and will pay a $750,000 fine, CEO Nigel Bostock, who was the engagement partner on the Akazoo audit, will pay a $25,000 penalty, and Matthew Stallabrass, who was the Akazoo audit’s engagement quality reviewer, will fork over $10,000.
According to the SEC’s order, Crowe U.K. issued a clean audit report of Akazoo’s 2018 financial statements. However, after Akazoo went public in September 2019 via merger with a special-purpose acquisition company, also known as a de-SPAC transaction, it was revealed that the company’s 2018 financial statements falsely claimed $120 million in revenue when Akazoo had only negligible amounts of revenue.
The SEC said Crowe U.K. claimed that it conducted its 2018 audit in accordance with Public Company Accounting Oversight Board (PCAOB) standards when, in fact, its engagement team working on the Akazoo audit, including Stallabrass, had almost no experience or training in PCAOB standards.
In addition, the Crowe audit team overlooked red flags when, for instance, they failed to exercise an appropriate level of due professional care or professional skepticism when Akazoo presented fabricated agreements and inauthentic confirmation letters to the audit team. The order also finds that Crowe U.K. made false statements in its audit report when it claimed that Akazoo fairly presented its financial statements in all material respects for 2018.
As the engagement partner for the Akazoo audit, Bostock failed to appropriately supervise the engagement, maintain adequate documentation, and exercise due professional care, among other things, the SEC said. Stallabrass failed to conduct a sufficient engagement quality review, the order states.
“Crowe U.K.’s failure to properly audit Akazoo contributed to the air of legitimacy that allowed Akazoo to become a publicly traded company,” Eric Werner, the regional director of the SEC’s Fort Worth Regional Office, said in a press release. “We will continue holding gatekeepers accountable, especially those whose professional failings allow financial frauds to enter our public markets.”
By violating PCAOB standards in connection with the 2018 Akazoo audit, Crowe U.K., Bostock, and Stallabrass engaged in improper professional conduct, the SEC said.
As part of the settlement, Crowe U.K., Bostock, and Stallabrass agreed to cease and desist from committing or causing violations of the proxy and reporting provisions of the Exchange Act and Regulation S-X. Crowe U.K. also agreed to pay disgorgement and prejudgment interest (the payment of which is deemed satisfied by Crowe U.K.’s payments in related private litigation), voluntarily withdraw its PCAOB registration, and implement undertakings related to the firm’s acceptance of new clients. The SEC order said Crowe U.K. submitted a request to withdraw its registration from the PCAOB on June 2.
Bostock and Stallabrass also agreed to be suspended from appearing or practicing before the SEC as accountants, with the right to apply for reinstatement after five years and two years, respectively.
Greece-based Akazoo reached a $38.8 settlement with the SEC in October 2021 for allegedly defrauding investors out of tens of millions of dollars in connection with its 2019 SPAC business combination.
After the business combination, Akazoo became listed on Nasdaq and proceeded to defraud retail investors by misrepresenting, among other things, that it had earned tens of millions of dollars in revenue during 2019 and increased its paying subscriber base by 28% year-over-year, when in fact, the company continued to have limited operations, no subscribers, and marginal revenue, all while depleting more than $20 million of investor funds, according to the SEC.