Many gallons of ink have been spilled over the last century in learned debate about the nature and consequences of different types of business relationships. Indeed, in the U.S., the dispute between those who thought a general partnership was a simple aggregation of individual partners was fought against those who were certain that the general partnership was a separate juridical person. The distinction arose during the drafting of the Uniform Partnership Act in 1914. That disagreement had many consequences concerning the jurisdiction of courts, the obligations of one partner to another, and even the nature of ownership of assets, especially real estate.

Only with the adoption of the Revised Uniform Partnership Act of 1997 in U.S. jurisdictions was the “entity versus aggregate” dispute resolved. If a partnership was not a separate legal entity, liability for a partnership act could be imposed on the several partners only after first recovering from the partner at fault. One of the most complex concerns in dealing with business organizations composed not of individual persons, but rather of separate groups of persons, is who or what is liable in the event of a wrongful (or tortious) act by one of the component groups. Generally, each of the member groups wishes to avoid liability for the tortious act or omission of another group (so-called “ringfencing”). These concerns are magnified when the member groups operate in different countries, each with its own legal system.

Out of these concerns, particular types of organizations, typically those that provide professional services, have sought to organize under a legal structure that preserves separateness while permitting coordination. The structure settled on by several major, international law firms and by some major accounting firms is a “Verein” (from German meaning “association”) under Swiss law because Swiss law recognizes the “personhood” of the whole without requiring registration (which is required by a Verein formed under German law). As one commentator observed, the use of such a structure allows a multinational professional firm to “operate globally under one brand whilst maintaining separate profit pools (and ring-fencing liability) in each country in which they operate.” Among the major accounting firms that have elected to utilize the Verein structure are KPMG and the eighth largest accounting organization, Crowe Global LLP (“Global”). According to its website, Global has some 200 member entities in over 130 countries. One of those entities is the London-based Crowe UK LLP (“Crowe”), which traces its origins to 1843 and provides a wide range of professional services. Indeed, Peter Varley, the London Managing Partner of Crowe, states the following on that firm’s website:

“We have the breadth and depth of quality and experience that you require, whether in audit, tax or advisory delivered with passion and integrity.”

At some point, Crowe registered with the Public Company Accounting Oversight Board (“PCAOB”), an entity subject to supervision by the U.S. Securities and Exchange Commission (“SEC”). The PCAOB was created under the Sarbanes-Oxley Act of 2002 to impose greater control of the quality of professional accounting and audit services provided to public companies, i.e., those whose securities are publicly traded in the U.S. capital markets. An accounting firm wishing to provide audit services to a public company must both register with the PCAOB and comply with the standards set for those professional services.

In 2016 Crowe became the auditor for Akazoo S.A. (“Akazoo”), a Luxembourg company headquartered in Athens, Greece. At the time, Akazoo was a privately held company owned by a parent company listed on the London Stock Exchange. Crowe performed the U.K. statutory audit and component reporting on Akazoo for use by the auditors of the parent company. The parent subsequently went private, but Crowe continued the statutory audits for the parent company’s auditors using “International Standards on Auditing applicable in the U.K.,” according to the Aug. 14, 2023 SEC Order Instituting Public Administrative and Cease-And-Desist Proceeding against Crowe and two of its partners (the “Order”).

Akazoo was a “purported music streaming company that offered its services to emerging markets.” A proxy and registration statement filed with the SEC on Aug. 19, 2019 (the “Registration Statement”), claimed that:

1. Over 4.6 million subscribers paid for Akazoo’s streaming content.
2. Payment was made directly to Akazoo or through partners.
3. Akazoo also had a free ad-sponsored radio service with 2.6 million users.
4. Akazoo operated in 25 separate markets.
5. Akazoo had been profitable since inception.
6. Akazoo had $120 million in revenue for 2018.
7. Akazoo had relationships with global, regional, and local music content providers.

The second item, payment through partners, was a key part of Akazoo’s claims, as it explained to Crowe that those payments were all made by “aggregators,” but no funds changed hands as the “revenues and expenses attributable to the aggregators” was netted out. Intrigued by the apparent business success of Akazoo, a special purpose acquisition company (“SPAC”) offered to merge with Akazoo and operate it as a business owned by the SPAC investors. It was that transaction that led to the filing of the Registration Statement. The Registration Statement contained the Akazoo financial statements and Crowe audit report for the years 2016-2018.

The merger between Akazoo and the SPAC became effective on Sept. 11, 2019. According to the Order, “[a]pproximately seven months later …a hedge fund published a report that Akazoo had negligible operations, subscribers, and revenue.” When the “de-SPAC-ed” Akazoo investigated it, they determined that those “financial statements could not be relied upon,” and subsequently terminated the CEO and disclosed that the pre-merger management had engaged in a multi-year fraud. Private litigation resulted in Crowe paying $11.5 million in damages to the SPAC investors. That payment was considered by the SEC in assessing penalties under the Order. The SEC charged that the Crowe audit team had almost no training or experience in complying with PCAOB standards.

A key deficiency was acceptance of information about the aggregators. According to the Crowe workpapers, there were three key aggregators that were all third-party businesses that maintained contracts with telecommunication companies through which Akazoo’s streaming services were sold. Crowe accepted the explanation from Akazoo management that the aggregators were due payments for managing licensing arrangements with content providers, and the aggregators also paid licensing fees for that content. The netting out of income against expenses was accepted as the reason Akazoo received no cash. When the hedge fund claims were investigated, the post-SPAC Akazoo learned that the aggregators did not exist. But it seems that the Crowe audit team never directly contacted the aggregators nor obtained complete confirmation of the income and expense. Moreover, the Crowe audit team allowed confirmation letters to be sent back to Akazoo employees rather than to Crowe.

The audit process as described in the Order appears to be close to no audit at all. The Order lays out in excruciating detail the fundamental failures of Crowe to perform professional audit services. Not only did Crowe fail to comply with PCAOB standards, but it also failed to follow its own policies and procedures as set out in both a Global Audit Manual and periodic Crowe e-mail alerts.

As part of its settlement with the SEC, Crowe voluntarily withdrew its registration with PCAOB. It was also censured, ordered to cease and desist from future violations and to disgorge $187,740 in ill-gotten gains plus $28,104 in prejudgment interest, and fined $750,000. Crowe also agreed to a complex procedure involving a paid consultant, training, and meeting certain qualifications in order to re-register with the PCAOB and take on public company audit work. The two Crowe partners were ordered to cease and desist from violations and were suspended from the privilege of appearing before the Commission.

The engagement partner, who was also a member of Global’s management board, may apply for renewal of the privilege to appear after five years. He was ordered to pay a penalty of $25,000. The Engagement Quality Review Partner, who was a member of Crowe’s supervisory board, may apply for renewal after two years and was ordered to pay $10,000. As the Regional Director of the SEC’s Fort Worth Regional Office stated in the Commission’s Aug. 14, 2023 Press Release accompanying the Order:

“Crowe U.K.’s failure to properly audit Akazoo contributed to the air of legitimacy that allowed Akazoo to become a publicly traded company. We will continue to hold gatekeepers accountable, especially those whose professional failings allow financial frauds to enter our public markets.” -Eric Werner, the Regional Director of the Fort Worth Regional Office

This is not the first time, and unfortunately will not be the last, when an audit firm has been caught up in performing services beyond its ken. As a supplementary example, similar events are detailed in my July 24^,, 2023 Blog “Why ‘Ask Marcum.’” As specified there, the desire to expand the business opportunities for an accounting firm led to disciplinary action against that firm by both the SEC and the PCAOB when it became fixated on representing SPACs. One may well wonder why the Crowe partners sanctioned in the Order were so prompt to take on the audit work needed for the SPAC merger. Indeed, subsequent developments contradict the Managing Partner’s claim that Crowe has “the breadth and depth of quality and experience that you require.”