DAVOS, Switzerland Jan 24 (Reuters) - In the midst of a U.S.-China quarrel over corporate auditing, the global chairman of audit giant KPMG said on Friday that a "constructive dialogue" was under way to defuse the dispute, which led days ago to U.S. sanctions against the Chinese arms of the world's largest accounting firms.
"We are in dialogue with the Ministry of Finance in China on the matter," KPMG Chairman Michael Andrew told the Reuters Global Markets Forum, an online community, in Davos, Switzerland, during the World Economic Forum meetings.
Months of tension over U.S. regulators' attempts to examine audits in China of U.S.-listed Chinese companies boiled over on Wednesday when a U.S. administrative law judge sanctioned the Chinese units of the so-called Big Four.
The Chinese arms of the Big Four - KPMG, Ernst & Young , Deloitte & Touche and PricewaterhouseCoopers - have refused to hand over to U.S. officials the records of audit work done by the Chinese units for U.S.-listed Chinese companies.
Fearing that complying with Washington's demands would violate Chinese secrecy laws and incur Beijing's wrath, the firms are in the middle of an international standoff that could escalate and damage U.S.-China economic relations.
The sanctions, imposed by U.S. Securities and Exchange Commission Administrative Law Judge Cameron Elliot, were expected and underscored "the need for both governments to resolve the impasse," Andrew said.
"The four accounting firms are caught in an unenviable position that if we hand our work papers over, we breach Chinese law and risk jail terms," Andrew said. "If we don't hand our papers over we get sanctioned by the U.S. government."
Judge Elliot declared that the Chinese arms of Deloitte & Touche, PricewaterhouseCoopers, KPMG and Ernst & Young should be suspended from auditing U.S.-listed companies for six months.
The firms "willfully" refused to turn over audit documents from China requested by the SEC and deserve little sympathy, Elliot said.
The SEC for years has been trying to get documents from the firms to investigate a rash of accounting scandals at Chinese companies whose stocks are listed in the United States.
KPMG's Andrew said the judge's ruling will be appealed by the firms. The matter could play out for months, or even years, as it goes before the five-member SEC and moves into the courts.
China's securities regulator said on Friday it deeply regretted Elliot's ruling. At a regular news briefing, ministry spokesman Deng Ge said China hoped the SEC "would make the correct decision" on the case, adding that "the SEC would bear all the responsibility for consequences of its action."