A couple days ago the SEC charged Crowe U.K. LLP, its CEO Nigel Bostock, and senior auditor Matthew Stallabrass for the firm’s deficient audit of music streaming company Akazoo Limited. All three agreed to settle the charges.
The client, Greece-based Akazoo S.A, settled with the SEC for $38.8 million back in 2021 “for allegedly defrauding investors out of tens of millions of dollars in connection with a 2019 special purpose acquisition company (SPAC) business combination.” In that news release, the SEC described Akazoo as a purported music streaming business, using the word five more times in its complaint against [PDF].
According to the SEC’s complaint, Akazoo represented to investors that it was a rapidly growing music streaming company focused on emerging markets with more than 38.2 million registered users, 4.6 million paying subscribers, and over $120 million in annual revenue. In actuality, the complaint alleged that the company had no paying users and, at most, negligible revenue. Akazoo allegedly leveraged these misrepresentations to enter into a SPAC business combination in 2019, in which the company received nearly $55 million from the SPAC and other investors. According to the complaint, 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. In reality, the company allegedly continued to have limited operations, no subscribers, and marginal revenue, all while depleting more than $20 million of investor funds.
Cue the public exclaiming “where were the auditors!?” Right here. From the SEC’s August 14 release on the Crowe charges:
According to the SEC’s order, Crowe U.K. issued a clean audit report of Akazoo’s 2018 financial statements. However, as the order finds, 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 order finds that Crowe U.K. claimed that it conducted its 2018 audit in accordance with Public Company Accounting Oversight Board (PCAOB) standards when, in fact, its Akazoo audit team had almost no experience or training in PCAOB standards. Further, the order finds that the 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. The order finds that, by violating PCAOB standards in connection with the 2018 Akazoo audit, Crowe U.K., Bostock, and Stallabrass engaged in improper professional conduct.
Additionally, the SEC order finds that Bostock, as the engagement partner for the Akazoo audit, among other things, failed to appropriately supervise the engagement, maintain adequate documentation, and exercise due professional care. The SEC order also finds that Stallabrass, the engagement quality reviewer for the audit, failed to conduct a sufficient engagement quality review.
Quintessential Capital Management pointed to Akazoo’s many alleged problems back in early 2020. “Looks like an accounting scheme,” “users, subscribers, revenue and profit may be profoundly overstated,” “suspicious signs of accounting manipulation,” and “😂” are just a few of the accusations laid out in their investigative report [PDF].
“Crowe U.K.’s failure to properly audit Akazoo contributed to the air of legitimacy that allowed Akazoo to become a publicly traded company,” said Eric Werner, the Regional Director of the Fort Worth Regional Office. “We will continue holding gatekeepers accountable, especially those whose professional failings allow financial frauds to enter our public markets.”