Discretionary pricing in a monopolistic audit market

This paper investigates the possibility of discretionary audit pricing in a monopolistic public sector market. The underlying rational of the fee determinant model has different expectations (in terms of profit-seeking behaviour, loss functions and liability exposure) from that implicitly employed in the broader audit fee literature, but incorporates the same variables. The opportunity for discretionary pricing is considered in the context of different types of auditees for which the auditor has varying degrees of monopoly power. Results are consistent with audits having lower (higher) input cost where loss exposure is lowest (highest) and acceptable audit risk is highest (lowest), and with the cost savings being appropriated by the auditor where monopoly power is the greatest and with fee discounting for agencies for which the auditor faces the greatest threat of competition.