it is difficult to say from this site of the computer what might be wrong, but my suggestion would be:
- Check if an account is being automatically created, when an user logins in with their microsoft account for the first time? Then at least you know for sure your configurations on that part are done correctly.
- Check the documentation on the synchronisation, it seems to be a seperated configuration: https://docs.moodle.org/400/en/Microsoft_365#User_Sync
But before you do: As for not being able to create manually: check ifyou have autopreventaccountcreation enabled at siteadmin > plugins > authentication. If so , then you cannot create an account manually.