This result suggests that in the post-inspection period, audited financial statements exhibit a lower tendency to avoid bottom-line losses through extraordinary items.
The results show that companies audited by Non-Big 4 sanctioned auditors in the pre-inspection period are less likely to avoid bottom-line losses.
As shown in Fig. 2, when ordinary income is slightly negative, Spanish firms use extraordinary items to avoid bottom-line losses.
A feasible explanation for the elusive conclusion may be based on the strong incentives for private firms to avoid bottom-line losses for financing purposes and to manipulate earnings to minimize tax payments.
(2) Companies face strong incentives to avoid bottom-line losses Gallén and Giner (2005) when borrowing from banks (Cano 2007), in order to mitigate the negative economic consequences of a deteriorated financial profile.
Therefore, this finding suggests, given that audited financial statements show a lower tendency to avoid bottom-line losses through extraordinary items, that companies audited by an auditor who has received a low sanction, enhance financial reporting quality in the post-inspection period.
A feasible explanation for those findings rests on the strong incentives for private auditees to avoid bottom-line losses (Gallén and Giner 2005) when borrowing from banks (Cano 2007), in order to mitigate the negative economic consequences of a deteriorated financial profile.
As Albiol put it: "We need to avoid finishing bottom".
