SEC settles with Crowe U.K. over botched audit claims

Dive Brief:

London-based accounting firm Crowe U.K. agreed to pay $750,000 to resolve Securities and Exchange Commission charges that it conducted a shoddy audit of music streaming business Akazoo, the agency announced.
Crowe U.K. claimed that it performed its 2018 audit in accordance with Public Company Accounting Oversight Board standards when, in fact, its Akazoo audit team had almost no experience and limited training in conducting PCAOB audits, the commission said in an order released Monday. Crowe U.K. also falsely claimed that Akazoo fairly presented its financial statements “in all material respects” for 2018, according to the order.
As part of the settlement, Crowe U.K.’s CEO, Nigel Bostock, and its senior auditor, Matthew Stallabrass, agreed to pay $25,000 and $10,000, respectively. The case follows previous SEC findings that Athens, Greece-based Akazoo defrauded investors out of tens of millions of dollars when it went public on Nasdaq in 2019 via a merger with a special purpose acquisition company in the U.S.

Dive Insight:

An April report from the PCAOB flagged widespread weaknesses in audits of SPACs, publicly traded entities created for the purpose of forming a merger or acquisition. The deficiencies included flaws in estimating the fair value of warrants and failures in evaluating departures from generally accepted accounting principles.

The SEC has ramped up scrutiny of SPAC deals, widely viewed as a faster, cheaper route to a public listing compared with a conventional initial public offering.

In October 2021, Akazoo agreed to pay $38.8 million in a settlement with the SEC resolving charges related to the company’s 2019 SPAC merger with Modern Media Acquisition Corp. After an investigation, the SEC found that Akazoo falsely represented that it generated more than $120 million in revenue in 2018 when, in reality, the company had only “negligible amounts” of revenue.

In its latest enforcement action, the SEC faulted Crowe U.K. for overlooking red flags while auditing Akazoo. For instance, the audit team failed to exercise “professional skepticism” when Akazoo supplied it with fabricated agreements and fake confirmation letters, the agency alleged.

“Crowe U.K.’s failure to properly audit Akazoo contributed to the air of legitimacy that allowed Akazoo to become a publicly traded company,” SEC Fort Worth Regional Office Director Eric Werner said in a Monday press release. “We will continue holding gatekeepers accountable, especially those whose professional failings allow financial frauds to enter our public markets.”

The SEC found that Crowe U.K., Bostock, and Stallabrass engaged in improper professional conduct by violating PCAOB standards in connection with the Akazoo audit. Bostock, as the engagement partner for the Akazoo audit, failed to appropriately supervise the engagement, maintain adequate documentation and exercise due professional care, while Stallabrass, the engagement quality reviewer for the audit, failed to conduct a sufficient engagement quality review, the SEC said.

Crowe U.K., Bostock, and Stallabrass agreed to settle the charges and pay penalties without either admitting to or denying the SEC findings, according to the Monday release. Crowe U.K. also agreed to be censured, pay disgorgement and prejudgment interest, voluntarily withdraw its PCAOB registration and implement certain steps related to the firm’s acceptance of new clients, the release said.

Bostock and Stallabrass 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.

Crowe U.K said it’s pleased the claims have been resolved.

“Audit quality and its continuous improvement remain a key priority for the firm,” the company said in an emailed statement.