Sanctions against Crowe UK LLP and Nigel Bostock
News types: Investigations
Published: 10 December 2024
This Press Notice concerns the outcome of an investigation into the relevant Statutory Auditor(s) and/or Statutory Audit Firm(s)1. It would not be fair to treat any part of this announcement as constituting or evidencing an investigation into, or any findings in respect of the conduct of, any other persons or entities.
The Executive Counsel of the Financial Reporting Council (FRC) has issued a Final Settlement Decision Notice (FSDN) under the Audit Enforcement Procedure and imposed sanctions against Crowe UK LLP (Crowe) and Nigel Bostock, in relation to the statutory audit of the financial statements of Akazoo Limited (Akazoo) for the financial years ended 31 December 2016 (FY16), 31 December 2017 (FY17) and 31 December 2018 (FY18). Mr Bostock was the audit engagement partner in each of the three years.
The sanctions imposed are:
Crowe:
- A financial sanction of £650,000 reduced from £1,000,000 to take account of a separate penalty imposed by the US Securities and Exchange Commission2 (US SEC) and further discounted for admissions and early disposal by 30% to £455,000.
- A published statement in the form of a Severe Reprimand.
- A declaration that the FY16, FY17 and FY18 Audit reports signed on behalf of Crowe did not satisfy the Relevant Requirements.
- A non-financial sanction requiring Crowe to:
- Conduct a root cause analysis to explain the causes of the breaches and to identify any measures taken since to prevent reoccurrence; and
- Assess the effectiveness of those measures, including by reference to an agreed sample of audits.
Mr Bostock:
- A financial sanction of £75,000 reduced from £100,000 to take account of a separate penalty imposed by the US SEC and further discounted for admissions and early settlement by 30% to £52,500.
- A published statement in the form of a Severe Reprimand.
- A declaration that the FY16, FY17 and FY18 Audit reports signed by Mr Bostock did not satisfy the Relevant Requirements.
The Respondents will also pay a sum of £500,000 towards the Executive Counsel’s costs of the investigation.
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 Mr 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, Mr 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 Mr Bostock co-operated with the FRC’s investigation and admitted the breaches.
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.”