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listening to music on headphones | accountingweb | Crowe slapped with SEC fines for bad audit
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Crowe faces the music over botched Akazoo audit

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Experts have questioned how senior auditors at Crowe were duped for several years by a sham music streaming service that filed false accounting paperwork, after US prosecutors fined and suspended the accountants involved.

17th Aug 2023
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Audit firm Crowe has agreed to pay US regulators $750,000 (£589,000) to settle poor audit charges related to its work for purported music streaming company Akazoo in 2018.

The US Securities and Exchange Commission (SEC) also fined Crowe CEO Nigel Bostock and senior auditor Matthew Stallabrass $25,000 and $10,000 respectively for their roles in the debacle. 

Akazoo, based in Greece, reached a $38.8m settlement with the SEC in October 2021 for allegedly defrauding investors out of tens of millions of dollars related to its 2019 special purpose acquisition company (SPAC) merger.

The deal went ahead following the clean 2018 audit granted by Crowe, however it later emerged the company statements were falsified. Akazoo claimed to have raked in $120m in revenue from 4.6m subscribers, when it was later found both numbers were negligible.

“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 R Werner, the SEC Regional Director of the Fort Worth Regional Office. “We will continue holding gatekeepers accountable, especially those whose professional failings allow financial frauds to enter our public markets.”

False notes

Crowe claimed its work was in line with Public Company Accounting Oversight Board (PCAOB) standards. However investigators said the Akazoo audit team “had almost no experience or training in PCAOB standards”.

The audit team also missed multiple red flags, the SEC said, noting they had failed to question where money was coming in from, given Akazoo had no paying customers. Bosses at the music streaming sites filed fake paperwork regarding bank deposits, which Crowe failed to scrutinise properly.

Internal audit and compliance specialist Ursula Schmidt questioned how Crowe could be duped by fabricated agreements and falsified confirmation letters to its audit team over three years.

“My big question here: how was cash faked?” said Schmidt. “I get it that agreements and confirmation letters are faked – anyone can do this – but who faked the bank statements? Surely, they would have shown some fake money that the fake aggregators had transferred from fake streaming revenues from the fake customers? Got some training from Wirecard here?”

SEC prosecutors added that Crowe made false statements in its audit report, and that Bostock and Stallabrass had engaged in “improper professional conduct”.

CEO Bostock, also the lead engagement partner, was criticised for failing to properly supervise the audit or keep proper records, while Stallabrass didn’t review to the standards expected, prosecutors said.

Keeping quiet

The auditors did not admit or deny any wrongdoing, and agreed the payments to settle the case. They have been suspended from appearing or practising before the SEC as accountants, with the right to apply for reinstatement after five years in Bostock’s case and two years for Stallabrass.

“We are pleased the claims have been resolved,” a Crowe spokesperson said in a statement. “Audit quality and its continuous improvement remain a key priority for the firm. We have no further comment at this time.”

The business was also officially warned, and must pay disgorgement and prejudgment interest in related private litigation. It has voluntarily withdrawn its PCAOB registration, and must carry out extended due diligence when accepting new clients as part of the agreement.

When the music stops

In 2021, the UK regulator said it was investigating a string of potentially botched audits, including Crowe’s work on Akazoo’s books across four years.

The firm went public in 2019 via the controversial SPAC method of floating, which allows private businesses to list publicly without undergoing the level of due diligence scrutiny carried out in an Initial Public Offering (IPO).

Akazoo raised $40.6m from investors through a private investment in public equity offering and another $14.2m from shareholders in Modern Media Acquisition Corp (MMAC) to fund the deal.

A year later the business unravelled as SEC enforcers closed in, stating former members of Akazoo’s management team and associates defrauded investors and had spun a “multi-year fraud”.

Akazoo said at the time aspects of its financial statements “should no longer be relied upon due to the possibility that such financial statements contain material errors”.

The business was delisted by Nasdaq in June 2020, and in April 2021 it reached a partial settlement with litigants.

Replies (12)

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By Hugo Fair
17th Aug 2023 10:57

“We are pleased the claims have been resolved,” a Crowe spokesperson said in a statement. “Audit quality and its continuous improvement remain a key priority for the firm. We have no further comment at this time.”

It would be nice, when core aspects of their work are so appallingly poor, if an organisation didn't just mouth the meaningless 'remain a key priority' kind of phrase.
Either it was NOT a key priority previously (in which case it needs to be introduced not just retained); OR if it WAS truly a key priority then it rapidly needs to be repaired (again not just retained)!

The complacency evidenced gives no credibility to the idea they even recognise past wrongdoing, let alone aim to prevent it in future.

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By JustAnotherUser
17th Aug 2023 12:21

would love to see Audit stories that are successful and not the same old 'failure' after the fact.

Audit is no where near my area but every one I read on here is about how the poor audit benefitted the top dogs and firms in with millions in fees and the ability to rake in millions more fraudulently and they get away with a slap on the wrist and a small % fine, cost of doing business.

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Replying to JustAnotherUser:
By Duggimon
18th Aug 2023 10:12

Audit is spectacularly boring and so chock full of regulatory issues that the success stories amount to auditing accounts which turn out to be right and only having to fill two lever arch files with paperwork to prove it, and having the regulator look at your file and only raise minor procedural issues.

That is as good as it gets, everything else, for any auditors doing it right, is a massive pain in the proverbial. We don't want to find anything wrong with the figures not because we're in league with the crooked clients, or because we've been paid to overlook things, or even because we don't want to sour our relationship with them. We don't want to find anything wrong because it's a huge pain to deal with it.

The regulation of the sector is growing every year because the standards at these massive firms are so poor, but the effect of the growing regulations is to ensure only massive firms can even do audits because it's such a pain for small firms to cope with the burden of the admin.

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Replying to Duggimon:
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By Dib
18th Aug 2023 12:42

Having to fill lever arch files - how quaint and old fashioned. :o)

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Replying to Duggimon:
paddle steamer
By DJKL
21st Aug 2023 13:25

Finding issues was always a pain.

A sample of 40 compliance tests, no 38 tested throws up something (missed authorisation etc) and then the audit junior (me in the 80s) got landed with an extra x to test because of that error.

Catch is the sorts of issues we now seem to hear about are not those that get unearthed by testing transactions but more seem to arise from nobody appearing to ask common sense questions and then chase/request third party verifications.

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Replying to JustAnotherUser:
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By leekris
18th Aug 2023 10:13

That's a good idea justanotheruser. Maybe some aweb contributors can step up here. There must be recent stories out there that can be highlighted whilst retaining confidentiality of how auditors uncovered fraud or saved potential investors from losses.

I'm not being optimistic - am I ???

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Replying to leekris:
John Toon
By John Toon
19th Aug 2023 17:04

The problem with positive audit news stories is it's like writing about people not murdering each other - it just isn't news. And those ultra positive stories about identifying fraud tend to get so locked up in related investigations and client confidentiality issues that by the time they could be news no one's interested. Also bear in mind it's not the auditors job to identify fraud - that's the directors' jobs so it's even less newsworthy.

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By Arcadia
18th Aug 2023 10:14

I did used to work in audit, including AIM and main market companies, but not FTSE 250. I would say all the audits I worked on resulted in adjustments to the accounts, particularly disclosures, often things management didn't particularly want to adjust or disclose. I would regard these as successful audits and thousands and thousands are being carried out each year. Of course these successes cannot be published due to client confidentiality. We always stood up for what we thought was right, and I do not really recognise the portrayal of audit firms in cahoots with management sometimes found here. I do agree that the appointment of auditors, and their fees being controlled being by management is a conflict of interest.

The Crowe case comes down yet again to getting bank confirmations, basic and easy. We always always got a bank letter and would delay until we got it, regardless of deadlines.

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By Springfield
18th Aug 2023 10:22

I'm going to draw together two modern first world problems, which seem to me to stem from the same root cause. I bring you VAR in football, and audit failures.

They are both failing (or failing far more than they should) for the same reason. Asking the wrong question.

So, in VAR the question is - Did the referee make a clear and obvious error? The question should be - What actually happened here? So, instead of - Did the referee get it wrong, the question should be - Is that a penalty or not? That gap is big enough to allow poor refereeing decisions to escape through.

In audit the question appears to be - Does this look OK? Again the question should be - What's actually happening here? In other words auditors should be writing their own script based on how a business in a particular sector should be operating, and then looking for the gaps. Instead they seem to be happy to just tick someone else's story because it looks plausible.

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Replying to Springfield:
John Toon
By John Toon
19th Aug 2023 17:19

Interesting comments and I'd draw more from this. What's been really interesting with VAR in football is they seem to have ignored all the learnings available from other sports - both codes of rugby being two key exponents of what I would say are reasonably successful implementations of VAR now. However, these weren't without their difficulties - the common complaints we hear over the time taken to make decisions, the lack of communication of decisions/discussions with fans being just two that continue to undermine VAR's use in football.

In audit we seem to simply accept that errors occur, big fines are dished out and everyone promises to do better. But what we should be doing is what the medical profession, generally, is much more effective at which is critically appraising why something has gone wrong and what should be changed across the profession to minimise the risks of the same thing happening again. Clearly given the current murder case that just been completed that system is far from perfect but it's better at ensuring positive outcomes in the long term.

What, for example, does an auditor at a small firm learn from the current debacle? Will they change the firm methodology as a consequence? Will their testing change? Will the training of the audit team change? Will ICAEW/ACCA change their course content to address this issue and others? Will anyone even remember this case in a couple of months time?

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By AndrewV12
18th Aug 2023 11:09

The deal went ahead following the clean 2018 audit granted by Crowe, however it later emerged the company statements were falsified. Akazoo claimed to have raked in $120m in revenue from 4.6m subscribers, when it was later found both numbers were negligible.

How can you miss that, didn't they hold the bank statements, I get the impression it was audited remotely.
But its the conundrum, Akazoo were more at fault than Crowe.

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