8 March 2002
Ernst & Young to take over KPMG investigation
The Managing Board of the Kowloon-Canton Railway Corporation (KCRC) today (Friday) decided to appoint Ernst & Young to take over from KPMG the investigation into the Corporation’s tender evaluation and contractual performance monitoring systems in connection with the West Rail Telecommunications System contract (DB-1500) and 27 supplemental agreements with West Rail Contractors.
Announcing this decision, KCRC Chairman Mr Michael Tien said that KPMG had, since its appointment on 29 January 2002, started work immediately with a view to completing its investigation into the telecommunications system contract within eight weeks.
"Discussions between KCRC and KPMG on the detailed terms and conditions of the appointment proceeded in parallel.
"In view of concerns expressed by the public and members of the Legislative Council in recent weeks, both KCRC and KPMG recognized that the investigation report might be made available to the public in full, barring legally or commercially sensitive information.
"All along, KPMG’s position has been that KCRC would need their consent before any information could be made public.
"As the disclosure of the report might lead to claims by persons or companies named in the report, the issue of indemnity became an important subject for discussion.
"In accordance with its global risk management policy, KPMG asked KCRC to indemnify it in respect of any claim, liability, loss or damage which arose out of all or any claims from third parties of whatever nature and howsoever arising in relation to the release of any report or material produced by KPMG in connection with its appointment.
"In addition, KPMG asked KCRC to accept liability for all costs and expense suffered or incurred by KPMG in the defence, settlement or investigation of those claims," he said.
Mr Tien said these indemnity requirements would expose the Corporation to unlimited liabilities for claims against KPMG.
"We concluded that it would be against prudent commercial principles to accept these indemnity requirements.
"As no agreement could be reached despite the goodwill and hard work of both sides, we made enquiries with a number of other international accounting firms with accounting forensic investigation capabilities.
"Among the firms contacted, only Ernst & Young confirmed that it would be prepared to undertake the investigation without an indemnity from KCRC for possible claims from third parties against the firm arising from the disclosure of the investigation report.
"In view of this, we have decided to appoint Ernst & Young to take over and complete the investigation within the budgeted fee proposal agreed between KCRC and KPMG," he said.
Ernst & Young has confirmed that they were not the auditors of Siemens nor the other contractors whose contracts will be the subject of this investigation.
Mr Tien added that KPMG would be paid about $1.6 million for the work it had done so far.
"The fees would not be wasted as KPMG would turn over all the materials gathered to Ernst & Young which would help its investigation.
"KPMG has been advised of this decision and has agreed to assist Ernst & Young during the course of the transfer.
"As a result of this change, we expect the completion of the investigation into contract DB-1500 to be deferred by about three weeks.
"Ernst & Young will complete the review of the 27 supplemental agreements as soon as practicable," he added.
Mr Tien said that the Steering Committee will continue to supervise and guide the investigation.
However, one of the members, Mr Brian Stevenson, has withdrawn from the Committee following the appointment of Ernst & Young to avoid any perception of a conflict of interest since he was the Senior Partner of the firm for 19 years until his retirement at the end of 1999.
Ernst & Young is one of the world’s top accounting firms and a pioneer in commercial forensic investigation in Hong Kong.
Since 1983 they have acted for major Hong Kong companies as well as various Government agencies.