Small accountancy firms should not be in any knee-jerk rush to consolidate, despite being encouraged to do so by their own regulators, the Financial Reporting Council.

Merge or suffer the ignominy of having the quality of your audits called into question. That is the implication behind the new accounting rules for small to medium-sized enterprises. And according to John Mason, a partner at French Duncan chartered accountants, many appear to be obeying, given a recent widespread tendency among smaller firms to give up audit registrations.

He believes the mantra of "consolidation" currently reverberating around the SME servicing end of the accountancy profession is threatening to open a can of worms.

He said: "We've had Paul George, director of the Public Oversight Board, recently spelling out his wish for small firms undertaking audits to consolidate in the interests of improving quality.

"But, just for a moment, let's look at the other side of the coin. With the audit threshold rising to current levels, the majority of Scottish companies no longer need an audit. There may be fewer audits but I have other concerns.

"The number of larger-than-small clients operating around the £5m-£6m mark could create fiscal time-bombs of a different and more worrying kind. Put bluntly, the irregularities which might occur at this much higher level will create, potentially, a different league of risk."

His case is that businesses operating improperly as a result of difficult trading conditions can avoid any scrutiny - and audit - if turnover is kept below £5.6m.

"Suppliers, bankers and the Inland Revenue can all lose out in these cases", he added. "And that's before you consider fraud and money-laundering. Big isn't necessarily beautiful, and fiscal cleanliness cannot be guaranteed in every case."

And anyway, the debate over consolidation is premature, said Mason, and needs to be viewed against the backdrop of the European Commission's plans to deregulate the accounting and audit environment.

The outcome of this project, still in its early stages, will go a long way to settling whether there is a place for the smaller firm in the audit market at all, as the aim of any forthcoming EC diktat will be to streamline the accounting and reporting industry, and will likely see many medium-sized companies become exempt from the audit. Only then will the following questions arise, said Mason: if medium-sized companies become audit-exempt, who will be left for any merged small firms to audit; and would they be any better off in a slimline marketplace than small firms are today, now that 80% of small companies have decided to opt out of the audit?

He said: "Indeed with many smaller firms, their owners frequently have their own compelling reasons for staying small. They can control the type of work they do, the level of risk they accept, and make decisions in their own time to redesign their services.

"They can even decide to disappear to Australia for a month over Christmas, if that slots in with their business schedule, without attracting any ire from the higher echelons."

However, with quality partly a function of constant engagement with and exposure to audit work of different types, an alternative to consolidation may be the emergence of specialist firms with highly competent staff and contemporary audit methodology, suggests Mason. "The specialisation route is one which may make sense to a growing number of smaller firms, but there isn't currently the data to suggest an overarching imperative of the sort which Mr George's remarks might imply.

"There are multiple factors impacting on audit quality, and no one-size-fits-all solution will suit every firm. There's no apparent sign of a sea change in the way Scottish companies do business either.

"The dynamics of the Scottish market surely justify the continuance of local solutions to suit that environment. There seems little reason to doubt many smaller accountancy firms will be operating very much as at present for a considerable time to come."