SEC Charges UK Audit Firm, CEO, and Senior Auditor for Failures in Connection with De-SPAC Transaction

The Securities and Exchange Commission (SEC) has taken legal action against Crowe U.K. LLP, a London-based audit firm, and its CEO, Nigel Bostock, along with senior auditor, Matthew Stallabrass, for their inadequate audit of the music streaming company Akazoo Limited. In response to the SEC’s charges, Crowe U.K., Bostock, and Stallabrass have reached a settlement agreement.

As per the SEC’s order, Crowe U.K. issued an audit report endorsing Akazoo’s 2018 financial statements as accurate. However, it was later revealed, following Akazoo’s public listing in September 2019 through a merger with a special purpose acquisition company (SPAC), that the company’s 2018 financial statements falsely declared revenue of $120 million, while in reality, Akazoo had generated only minimal revenue. The SEC’s findings highlight that Crowe U.K. asserted that its 2018 audit of Akazoo adhered to the standards set by the Public Company Accounting Oversight Board (PCAOB), despite the audit team’s lack of experience and training in these standards. Furthermore, the order points out that the audit team disregarded warning signs, such as failing to exercise the necessary professional care and skepticism when Akazoo presented fabricated agreements and falsified confirmation letters to the auditors. The order also underscores that Crowe U.K. provided misleading information in its audit report by asserting that Akazoo’s financial statements for 2018 were fairly represented in all significant aspects. The SEC’s order determines that the involvement of Crowe U.K., Bostock, and Stallabrass in the 2018 Akazoo audit, in violation of PCAOB standards, amounts to improper professional conduct.

Furthermore, the SEC’s order notes that Bostock, who served as the engagement partner for the Akazoo audit, failed in his duty to adequately supervise the engagement, maintain proper documentation, and exercise the required professional care. Similarly, Stallabrass, in his role as the engagement quality reviewer, did not conduct an adequate review of engagement quality.

Eric Werner, the Regional Director of the Fort Worth Regional Office, commented on Crowe U.K.’s shortcomings: “Crowe U.K.’s failure to conduct a thorough audit of Akazoo contributed to the perception of credibility that allowed Akazoo to transition into a publicly traded entity. We remain steadfast in holding those responsible accountable, especially when their professional lapses facilitate financial fraud entering our public markets.”

While not admitting or denying the SEC’s findings, Crowe U.K., Bostock, and Stallabrass have agreed to settle the charges. They will each pay penalties of $750,000, $25,000, and $10,000, respectively. Additionally, they have committed to refraining from engaging in or causing violations of the proxy and reporting provisions of the Exchange Act and Regulation S-X. Crowe U.K. has also agreed to be censured, disgorge funds and pay prejudgment interest (with payment being satisfied through related private litigation payments), voluntarily relinquish its PCAOB registration, and adhere to commitments related to client acceptance. Bostock and Stallabrass have also agreed to be suspended from practicing before the SEC as accountants, with the option to apply for reinstatement after five and two years, respectively.