The FRC has imposed sanctions against Crowe UK LLP and Nigel Bostock over the audit of Akazoo Limited.
Crowe received a financial sanction of £650,000, plus a severe reprimand. This was reduced to £455,000. The FRC said the audit declarations for FY16, FY17 and FY18, signed by Crowe, did not satisfy the relevant requirements.
The audit engagement partner in each of the three years, Nigel Bostock, was fined £75,000 and issued with a severe reprimand. This was reduced to £52,500.
The respondents will also pay £500,000 towards the Executive Counsel’s costs of the investigation.
FRC explained that Akazoo was a private limited company that apparently operated as an online music streaming service with a particular focus on emerging markets. Akazoo reported significant growth during the period 2016 – 2018, with reported revenue in 2018 in excess of €100 million. In September 2019, Akazoo and a Special Purpose Acquisition Company merged to form Akazoo SA with shares of this new company being listed on the NASDAQ.
In April 2020, in response to allegations made by an activist hedge fund that Akazoo SA was in fact generating negligible revenue, Akazoo SA engaged a special committee of independent directors to undertake an internal investigation. The findings of that investigation included that:
“… former members of Akazoo’s management team and associates defrauded Akazoo’s investors … by materially misrepresenting Akazoo’s business, operation, and financial results as part of a multi-year fraud…”
In June 2020, Akazoo SA was delisted from NASDAQ.
The FRC investigation was opened in September 2021 as a result of information being provided to the FRC by another regulatory body.
Crowe and Bostock have admitted breaches of Relevant Requirements in each of the three audit years relating to:
- Failing to obtain a sufficient understanding of the business and the control environment and insufficient consideration of the risks of misstatement due to fraud.
- Failing to obtain sufficient audit evidence relating to revenue and (in 2018 only) failing to properly audit the implementation of the relevant accounting standard, IFRS 15.
- Failures in the process of obtaining external confirmations of debtor balances and a failure to obtain sufficient audit evidence relating to the settlement of those balances.
- Failing to maintain professional scepticism.
- Failing to prepare adequate audit documentation recording the audit procedures performed, evidence obtained, and conclusions reached.
Further, in each of the audits, Bostock failed to properly take responsibility for the direction, supervision, and performance of the Audits in that he failed to identify key audit risks, and to ensure that appropriate procedures were performed, and evidence obtained, to provide assurance over those risks.
Crowe and Bostock co-operated with the FRC’s investigation and admitted the breaches.
FRC stressed that the breaches were not intentional, dishonest, deliberate nor reckless, but they were serious and spanned three audit years. Due to poor audit execution and a lack of professional scepticism, the auditors were ill-equipped to identify what appears to have been serious fraud perpetrated by management throughout the relevant period. Additionally, Crowe’s unqualified audit opinions were relied on to support Akazoo’s NASDAQ listing and the breaches thus contributed to substantial loss suffered by investors.
Jamie Symington, Deputy Executive Counsel, said: “The auditors’ failings in this case were very serious. They failed to understand Akazoo’s business properly and made basic errors in auditing its revenue and debtor balances. They did not maintain professional scepticism and missed opportunities to spot fraud. These failings were particularly serious given Akazoo’s rapid growth, its ambitions to list in the US, and the reliance that investors and others placed on Crowe’s clean audit opinions throughout the relevant period.”
