Section 406 of Sarbanes-Oxley Act

Enhanced Financial Disclosures:

The 2002 Sarbanes-Oxley Act was enacted as law after several incidents of accounting failures that involved several functions established to safeguard the interests of public investors. In attempts to deal with these issues, the legislation created an absolute revision of the regulatory for professionals in public accounting and auditing though it contained several very controversial provisions (Verschoor, 2012). The revision of the regulatory framework by the act was also geared towards providing guidance for enhanced corporate governance. After its enactment, SOX became the most comprehensive and influential law impacting public corporations and their independent auditors since early 1930s. The legislation mainly focuses on two major segments of investor protection including the responsibility and accountability of Chief Executive Officers and Chief Financial Officers for all financial disclosures and associated controls. The second area is promoting enhanced professionalism and involvement of corporate audit committees.

This act has primarily been effective or successful in enhancing corporate focus on a strong ethical culture in public owned companies (Verschoor, 2012). This has been achieved through strengthening of financial reporting through the establishment of new controls regarding financial disclosures and related aspects. However, this legislation has not been completely effective in preventing corporate scandals effectively. For instance, this law did not prevent the 2008 global financial crisis, which was partly attributed to unethical financial practices. Consequently, there is need for improvement in company performance since the effectiveness of this legislation is partly dependent on the vigor with which it is enforced.

One of the most important sections of Sarbanes-Oxley Act is Section 406, which necessitates the adoption of a code of ethics for senior financial officers ("Section 406," n.d.). Based on this provision, each reporting firm must swiftly disclose failure to embrace such rules or any modifications or waivers from the code of ethics. The significance of this section is demonstrated in its goal of promoting honest and ethical conduct to prevent any wrongdoing. Some of the important measures to prevent any wrongdoing include dealing with conflicts of interest, aligning internal disclosure procedures, and promoting compliance with relevant government policies (Salem & Franze, n.d.).

In light of recent corporate accounting failures, Section 406 is an important area of the Sarbanes-Oxley Act because it deals with some of the factors that contribute to such incidents. Most of these corporate accounting failures were partly brought by unethical practices with regards to financial accounting and reporting. Some of the major examples of these incidents that show the need for effective ethical standards include the Enron Scandal, which was brought by audit failure involving several executives at the firm who were found guilty of unethical executive compensation. The second example is Tyco scandal in which the Chief Executive Officer improperly used the company's funds and used inappropriate merger accounting practices. Since the incidents originated from unethical practices by senior financial officers, they demonstrate the need for code of ethics for these executives to deter any wrongdoing through ensuring appropriate financial accounting and reporting practices.

Generally, the Sarbanes-Oxley Act has been a transformative and comprehensive regulatory framework that has achieved huge successes in preventing corporate accounting scandals. This act has mainly benefited the public because the recent corporate accounting incidents that contributed to the enactment of the legislation occurred in publicly owned companies, which resulted in huge losses to the investing public. Therefore, its effectiveness benefits the public from losses due to illegal and unethical financial accounting practices.