UK auditing firm charged by SEC over Nasdaq listing failures

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British audit firm Crowe UK and its chief executive Nigel Bostock have been charged by the US Securities and Exchange Commission for failures in its audit of a music streaming company that went public on Nasdaq in the Spac boom.

Akazoo, a Scotland-incorporated, Greece-headquartered company, claimed to have almost 40mn registered users and $120mn in annual revenue when it was acquired by Modern Media Acquisition Corp, a shell company, in 2019.

In fact, it had no paying customers and negligible revenue, and has since been delisted.

According to the SEC charges announced on Monday, Crowe UK failed to discover that the company was presenting fabricated agreements and fake confirmation letters to its audit team in the three years leading up to the listing, through which Akazoo raised $55mn.

“Crowe UK’s failure to properly audit Akazoo contributed to the air of legitimacy that allowed Akazoo to become a publicly traded company,” said Eric Werner, a regional director at the SEC.

“We will continue holding gatekeepers accountable, especially those whose professional failings allow financial frauds to enter our public markets.”

Crowe UK did not confirm or deny the allegations, but the firm, Bostock and another senior auditor, Matthew Stallabrass, will pay penalties totalling $785,000.

The firm has also agreed not to audit any more US-listed companies. The SEC said the audit team assigned to Akazoo “had almost no experience or training in” US standards.

Crowe UK said it was “pleased” the SEC claims had been resolved. “Audit quality and its continuous improvement remain a key priority for the firm,” it said.

The firm has also been under investigation since September 2021 by the Financial Reporting Council, the UK’s accounting regulator, over its audits of Akazoo. The UK probe covers the financial statements of Akazoo Limited for each of the three years to 2018. The FRC has not provided further details of its investigation. Crowe has said it is co-operating with the watchdog. 

Crowe UK employs more than 1,000 people, according to its most recent accounts for the 12 months to March 2022. It is the UK’s eighth largest auditor by number of London-listed companies audited and 13th by market value of its clients, according to Adviser Rankings data for the second quarter of 2023.

Its audit clients are generally either private companies or smaller listed businesses. It does not audit any companies in the FTSE 350 index — the largest companies listed on London’s main market.

Akazoo admitted in 2020 that its management had perpetrated “a multiyear fraud”. The SEC said this was achieved through the creation of fictional “aggregators”, third-party businesses that supposedly sold Akazoo’s streaming services to telecoms companies, to be offered to their customers.

Despite red flags, Crowe UK “never validated the existence of the aggregators,” according to the SEC complaint. “No one from the engagement team ever directly contacted the aggregators . . . [and] did not verify the physical addresses of the aggregators,” it said.

The SEC announced a $38.8mn settlement of charges against Akazoo in 2021.