MFA Shows Disabled, But Being Used

This is all down to a new and ill-conceived UI from Microsoft. They've basically combined MFA setup with account recovery setup. Prior to this change, if you had self-service password reset enabled, on first login users would be prompted to setup a recovery phone and email. If MFA was enabled, they'd be prompted to setup MFA.

The combined approach is highly confusing when not wanting MFA. It still allows a user to setup MFA even when it's disabled on the account in Azure. Indeed it's designed to make you think you have to set it up. Just more nonsense from unskilled product managers and developers with little experience of the real world and zero common sense.

Same with the Security Defaults. These force use of MFA for all accounts, despite Microsoft's own recommendation to have at least one GA account not using MFA in case of MFA issues. Indeed a non-MFA GA account is needed for hybrid operation as well as for any 3rd party services that need access to the 365 tenant.

Anyhow, the solution is to ignore the initial presentation of the setup. For option 1, select Phone instead of Authenticator App from the dropdown. Then complete the phone verification as it used to be done. Then select Email for option 2 and complete that. Account is now setup with password reset info needed but without MFA enabled.

That still leaves the issue that, if the user chose to enable MFA during initial account setup, this won't reflect in AAD. That still shows MFA as disabled!