Meaning
Financial adjustments issued by a governing body or auditor remove specific expenses from a claim for reimbursement. When a contract allows for post-payment review, an audit disallowance functions as a mechanism for reclaiming funds that were spent outside of agreed categories. This action occurs when a partner fails to provide proof of expenditure or violates specific spending limits defined in the distribution agreement.
Recovery Clause
Legal provisions in a Master Service Agreement typically define how the payer collects the money. Following an audit disallowance, the vendor might deduct the amount from the next commission check or invoice payment.
Documentation Burden
Verification of every line item is the responsibility of the party requesting the funds. Failure to produce a valid receipt often triggers an audit disallowance regardless of whether the expense was genuine. Administrative rigor prevents these losses.
Contractual Recourse
Dispute resolution steps exist for parties who disagree with the findings of a financial review. If an audit disallowance is contested, the contract may require a second review by an independent third party to ensure that the initial assessment was accurate and consistent with industry standards. This secondary process adds time but protects the relationship between the supplier and the distributor.
The final decision remains binding once the review period expires.
