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The executive counsel of the Financial Reporting Council (FRC) has fined Crowe UK LLP and Nigel Bostock, in relation to the statutory audit of Akazoo Limited (Akazoo) for the financial years of 2016, 2017 and 2018.
Against Crowe, the FRC imposed a financial sanction of £455k, reduced from an initial £1m, as well as declaration that the FY16, FY17 and FY18 audit reports signed on behalf of Crowe did not satisfy the relevant requirements.
In addition, the reporting council has required 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.
Against Bostock, who was the audit engagement partner in each of the three years, the FRC issued a financial sanction of £52,500, reduced from £100k, and a declaration that the FY16, FY17 and FY18 audit reports signed by him 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 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 €100m (£82.5m). 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.
The FRC said Crowe and Bostock admitted breaches of relevant requirements in each of the three audit years. 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”.
The FRC investigation found that the breaches were “not intentional, dishonest, deliberate nor reckless”, but they were serious and spanned three audit years.
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.”
A spokesperson for Crowe said: “We are pleased the matter has been resolved. Since the work was carried out, we have made a significant investment in our audit business through the development of our audit methodology and guidance. Audit quality is a key priority for the firm and we remain committed to its continuous improvement.”
