Disallowance: Overview, definition, and example
What is disallowance?
Disallowance refers to the refusal to accept, approve, or recognize something, typically in a legal, financial, or regulatory context. In business or government settings, disallowance can occur when a claim, expenditure, action, or decision is deemed inappropriate, non-compliant, or invalid. This can result from an audit, review, or official determination that a particular action or expense does not meet the required standards, policies, or legal requirements.
For example, if an organization submits an expense report for reimbursement and some of the expenses do not comply with company policy, those expenses may be subject to disallowance.
Why is disallowance important?
Disallowance is important because it ensures compliance with rules, regulations, and policies. By disallowing improper or non-compliant actions or expenses, organizations, governments, and businesses can protect themselves from financial mismanagement, fraud, or violations of laws. Disallowance serves as a form of oversight that maintains accountability and helps ensure resources are used appropriately. It can also encourage transparency and discourage improper conduct, contributing to the overall integrity of financial or operational practices.
In financial audits, for example, disallowance helps identify irregularities and ensures that only legitimate claims or expenditures are accepted.
Understanding disallowance through an example
Imagine a government program that funds healthcare initiatives. During an audit, certain expenses submitted by a healthcare provider are found to be unrelated to the program’s objectives. For example, the provider may have submitted charges for entertainment expenses, which do not align with the program's guidelines. As a result, those charges are subject to disallowance, meaning the provider will not be reimbursed for those costs.
In another example, a company reimburses employees for business-related travel expenses. An employee submits an expense for personal meals during a business trip, which is not covered under the company’s travel policy. The expense is disallowed, meaning the employee must cover the cost themselves and will not be reimbursed.
An example of a disallowance clause
Here’s how a clause about disallowance might appear in a contract or agreement:
“The Client acknowledges that any expenses submitted for reimbursement under this Agreement must comply with the Company’s established policies and guidelines. Any expenses deemed non-compliant, irrelevant, or improper may be subject to disallowance and will not be reimbursed.”
Conclusion
Disallowance is a key process in maintaining financial integrity, legal compliance, and accountability in business and government. By disallowing improper actions or expenditures, organizations ensure that resources are used in accordance with rules and regulations, preventing misuse and maintaining transparency. Whether in the context of audits, financial transactions, or policy enforcement, disallowance plays an essential role in protecting the interests of organizations and stakeholders.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.