Auditing Firm Fined for Deficient Auditing of SPAC Target

An auditing firm, its CEO and senior auditor settled SEC charges for failing to address red flags in an audit of a music streaming company’s revenue claims related to a business combination with a SPAC.

In the Order, the SEC stated that in an audit report filed in connection with the initial business combination between the SPAC and the streaming company, the filing falsely stated that the streaming company earned over $120 million in revenue and had over four million paying subscribers. The SEC found that the streaming service had "only negligible amounts of revenue and subscribers."

According to the SEC, the streaming service "fabricated" companies known as "aggregators" to create the appearance of having revenue. The SEC stated that the auditing company lacked sufficient auditing procedures, and "did not exercise an appropriate level of due professional care or professional skepticism." The SEC found that the auditing company never attempted to contact the purported aggregators. The SEC stated that the auditing firm also failed to address red flags caused by the "facially problematic agreements" and "dubious confirmation letters" that the streaming service provided the auditing firm to support its claims.

As a result, the SEC stated that the firm violated Exchange Act Section 13 ("Reports of Issuers of Securities Registered Pursuant to Section 12 Annual Reports"), Section 14(a) ("Solicitation of Proxies"), Rule 13(a)-19 ("Reports by shell companies on Form 20-F"), Rule 14a-9 ("False or misleading statements") thereunder and Regulation S-X Rule 2-02(b)(1) ("Accountants' reports and attestation reports").

To settle the charges, the firm agreed to (i) cease and desist from further regulatory violations, (ii) a censure, (iii) various civil money penalties and (iv) disgorgement of $187,740 plus prejudgment interest of $28,104. The SEC stated that payment is deemed satisfied by the firm’s payment of $11,500,000 to the company’s defrauded investors based on settlements resulting from private litigation. The CEO and senior auditor were also banned from appearing or practicing as accountants before the SEC.