Financial reporting quality across listed, medium-sized and small companies in the UK: a preliminary look.

Abstract

The International Accounting Standards Board (IASB) and the UK Accounting Standards Board (ASB) have adopted different financial reporting rules for different classes of company. The IASB have issued IFRS for Small and Medium-sized Entities (SMEs) in addition to full International Financial Reporting Standards (IFRS); in the UK, currently companies follow IFRS (for public companies), UK GAAP (for medium-sized companies) or FRSSE (for small companies). It is difficult to evaluate the efficacy of this approach to regulation since the ASB (and IASB) are not clear as to what consequences should follow. Is the more extensive regulation for public companies expected to result in higher accounting quality than medium and small companies; or is it necessary to combat the increased opportunity and incentive for earnings management in public companies, so that there is the same accounting quality across the different groups of companies? The main objective of this study is to undertake a preliminary investigation of cash flow to earnings ratios as a measure of accounting quality in order to inform the future policy and discussion about the differential reporting framework. We find that the financial reporting behaviour of medium sized entities is significantly different from public and small companies. This suggests that accounting standards do not equalise accounting quality.