Earnings Quality Across Listed, Medium-Sized and Small Companies in the UK

Abstract

In response to business needs, different types of company have followed different financial reporting rules. UK GAAP was replaced by IFRS for listed companies and by FRSSE for small companies. Recently, the IASB has issued IFRS for SMEs designed for companies that do not have public accountability, and this has prompted the UK to formally recognise its tripartite reporting system; from 2015, listed companies will follow IFRS, medium sized companies will follow IFRS for SMEs and small companies will follow the FRSSE. We investigate earnings quality across the three groups within the current regulations. We find that medium sized companies have the lowest earnings quality. The earnings quality of listed companies and small companies are similar. Even in a sub-sample of seemingly suspicious companies, where earnings quality is lower than in the full sample, medium sized companies still have the lowest quality. The evidence supports the less stringent reporting requirements for small companies. The lower quality of reporting observed in medium sized companies may be justifiable if the demand for their public information is sufficiently lower and the cost of supply less easily absorbed than in the case of listed companies.