Earnings quality across different reporting regimes: listed, large private, medium-sized, small and micro companies in the UK

Since the UK Companies Act 1981, there has developed a multi-tier framework for financial reporting. IFRS is designed for listed companies, there is a GAAP for large private and medium sized companies, and the FRSSE is designed for small companies, which also are exempt from mandatory audit. The recent EU Accounting Directive reinforces this strategy and recognises a new class of company, the micro company. However, it is not clear how the quality of reporting is affected by this multi-regime approach, and by the ability to switch between regimes. The purpose of this paper is to assess the smoothness of earnings between the different types of company from 2006-2013, based on 594,000 observations. We find that the earnings of listed companies are the most informative (least smooth), closely followed by small and micro companies. In contrast, the earnings of large private and medium sized companies are much smoother, suggesting that they are under regulated. The results are inconsistent with the equalisation of earnings quality across all groups, and with the discipline of regulation reflecting the size, complexity of companies and their agency issues. Small companies do not exploit the audit exemption to smooth earnings.