Top US SEC enforcer warns boards over their duties

WASHINGTON Dec 8 (Reuters) - U.S. securities regulators are putting corporate boards and audit committees on notice that their role will be scrutinized when financial fraud occurs at their companies.

"Sitting on a board confers both prestige and responsibilities and we want to ensure that board members have properly discharged their duties when significant financial fraud occur," the Securities and Exchange Commission's chief enforcer, Robert Khuzami, said on Tuesday.

Khuzami warned boards and audit committees not to rubber stamp management's decisions and said when the SEC investigates financial fraud it is probing whether the directors and audit committees played any role.

"That includes investigating active participation in wrongdoing as well as recklessly ignoring red flags or other information," Khuzami said at an American Institute for Certified Public Accountants conference.

Amid the worst financial crisis in decades, the SEC is trying to make corporate boards more accountable.

The regulator has proposed requiring companies to tell shareholders more about pay policies, board members' qualifications and why they chose a certain leadership structure.

Frustrated with how companies have performed, shareholders are taking a more active role in how their companies are governed, pushing for a say on pay, seeking an easier path to placing items on the annual corporate ballot and voting against director re-elections.

Khuzami said when investigating financial fraud, the SEC will want to know that boards were exercising due diligence and that audit committees were not ignoring warning signs and were drilling down into key accounting issues and understanding a company's reporting.

Separately, Khuzami chided audit firms for withholding subpoenaed documents and asserting "work product privilege" on behalf of an audit client. "We are skeptical of such claims," he said.

"It is difficult to see how audit documentation prepared by, or relied on, by an auditor in connection with an audit report can be privileged," he said. (Reporting by Rachelle Younglai; Editing by Tim Dobbyn)