What is Invoice Discrepancy? How to Resolve It?
Invoice discrepancy is a common but critical problem in invoice processing systems. It refers to the difference between an invoice and its related purchase order, receipt, contract or other supporting documents. Discrepancies can result in delays in payments, disputes, and various complications between the involved parties.
Therefore, it is essential to identify and resolve any invoicing discrepancies. It also helps keep the accounts payable (AP) operations smooth and efficient. In this piece, you will learn what an invoice discrepancy is, its root causes and common examples. Along with that you will learn how to resolve invoice discrepancies as well.
Key Takeaways
- An invoice discrepancy arises when a specific invoice does not match other records, for instance, purchase orders, contracts and receipts.
- The usual invoice discrepancies, which are regularly encountered, include non-correspondence of the PO numbers, tax, quantity, and vendors.
- Confirm the invoice before contacting the supplier with the PO, GRN, contract and internal records.
- In cases when discrepancies occur, it is necessary to request correction and provide the relevant information.
- The investigation of discrepancies may prevent future accounts payable errors and inconsistencies.
What is an Invoice Discrepancy?
An invoice discrepancy is any difference between an invoice and its corresponding document, such as a PO, receipt, contract, or other documents. The discrepancy can arise for a variety of reasons such as quantity, vendor identifier, tax code, etc.
Invoice discrepancies can happen for many reasons, ranging from unintentional human mistakes, outdated information, changes to agreed terms, to potential fraud activity.
What Causes Invoice Discrepancies?
There are several reasons for invoice discrepancies, for instance, wrong data entry, unauthorized changes made to the invoice, discrepancies in the unit of measure, etc. Below are a few common reasons that might result in invoice discrepancies.
- Incorrect Pricing: The amount charged by the supplier differs from that mentioned in the purchase order (PO) or contract.
- Quantity Mismatch: A quantity mismatch occurs when the billed quantity is different from the quantity ordered or received.
- Unauthorized Changes: Changes in quantity, price, or services are made without any authorization.
- Data Entry Errors: Manual data entry can cause different types of data entry errors that lengthen the whole invoice processing process.
- Unit of Measure Differences: The invoice and purchase order use different units of measure.
- Communication Gap: Changes to details, price, or delivery are not discussed with the other party.
- Incorrect Goods Details: The invoice includes goods that are different from the ones ordered and listed on the PO.
When processing invoices, these issues are very common, and they increase the processing time as well. But hiring an invoice processing service helps reduce invoice discrepancies, payment time and improve business relationships.
Common Invoice Discrepancies
There are many invoice discrepancies seen during invoice processing. But among them some discrepancies are seen often. Here are the common invoice discrepancies.
1. Price Mismatch
Price mismatch refers to a situation when the billed price and the price mentioned in the PO do not match. The causes of discrepancy may differ, but it is usually a result of an unauthorized price change, input errors, incorrect pricing, etc.
Example: Invoice indicates 100 units of goods for $22 but the PO lists 100 units for $20.
2. Quantity Difference
A quantity discrepancy is a situation where the invoice quantity does not match the quantity ordered or received. It occurs due to data entry errors, record errors, and shipping errors.
Example: A company orders 300 units from a vendor, but it is delivered 280 units, and the invoice is issued for 300 units.
3. Tax or Fee Errors
Tax or fee errors refer to when there is a difference between the amount of taxes or applicable fees on the invoice and what was agreed or required. This is typically caused by miscalculations or old billing details.
Example: A contract agrees on a 5% tax rate, but the invoice amount shows an 8% tax rate.
4. Missing or Incorrect PO Number
If an invoice is missing or has a different PO number, then the invoice contains a missing or incorrect PO discrepancy. It can be difficult for the AP team to track down an invoice as it is a typing error or data error.
Example: An invoice refers to PO-4589, but the goods were actually ordered under PO-4597.
5. Vendor Information Mismatch
Vendor information means vendor name, address, tax ID, etc., when vendor information on the invoice differs from the approved vendor records or relevant purchasing documents. This requires manual verification before the invoice can be processed.
Example: On an invoice, the buyer company name is “XYZ Supplies LLC,” and on the approved vendor record, the company name is “XYZ Supply Company LLC.”
6. Payment-term mismatch
Payment term mismatch occurs when the payment terms on the invoice are different from the payment terms on the purchase order. This can affect when the invoice should be paid.
Example: The PO specifies payment within 30 days but the invoice states that the payment is due within 45 days.
7. Billing-period mismatch
This discrepancy occurs when the invoice date or billing period does not align with several factors, including the transaction, agreed billing period, or contract terms. This can affect payment scheduling and other AP processes.
Example: A service contract is indicated to cover the month of January, while the invoice erroneously bills for the service for February.
How to Resolve Invoice Discrepancies Step by Step
Invoices containing discrepancies not only lengthen the process but it piles extra work. One discrepancy means going through the relevant documents, finding out the issue, informing the supplier, and seeking correction.
After all the investigation is made, only then is it qualified for approval. Here is a step-by-step guide on how you can handle an invoice discrepancy:
Step 1: Identify the Discrepancy
The first step here is to find out or discover the discrepancy. In order to check if there is any difference, cross-check the invoice with its related documents through 2-way or 3-way invoice matching, for instance, purchase order, goods receipt note (GRN), contract, delivery receipt and so on.
Look for key invoice details including:
- Unit price
- Quantity
- Product or service description
- Taxes
- Discounts
- Shipping or other agreed charges
- Payment terms
Now identify which invoice information does not match the supporting records.
Example: Suppose the buyer orders 100 units of goods for $45 and the invoice received by the buyer is for 100 goods for $50. Here, the quantity is the same; on the other hand, the price differs; there is a price gap.
Step 2: Verify the Internal Records
Verify the internal records before you contact the supplier. Look into the company’s records and make sure whether the discrepancy is valid or if there is any approved change. The finance team can also check for another explanation. Review the factors mentioned below before contacting the supplier.
- Original PO
- Approved PO changes
- Vendor agreement or contract
- Receiving records
- Purchase approvals
- Relevant communications
Example: The AP team checks and confirms that the approved price per unit of goods was $45. They also check the receiving record and find out that all 100 units of goods were received.
Now the team looks for any updated price changes but finds none. This confirms that the $50 price does not match the approved price.
Step 3: Determine the Correct Resolution
After finding the problem and internal documentation checks have been made, it is time to identify what specific information should be amended. The correct resolution is entirely dependent on the core reason behind the mismatch and company procedures.
Example: because there were no approved changes in price, the buyer should not pay the extra $500 unless it is supported by an approved change or valid documents. The supplier should correct the invoice so the price of 100 goods are billed correctly at a rate of $45 each. Making the total payable amount $4,500.
Step 4: Contact the Supplier
Now having defined the difference and the resolution you want to adopt, it is time to contact the supplier to fix the invoice dispute and keep a good relationship with them. Instead of just pointing out that the vendor invoice is incorrect, the AP team should be ready to offer them a correct explanation as to why they are wrong and offer relevant data.
Call the supplier, tell them the situation and the specific details of the mismatch so that they can investigate as well. The following information should be detailed:
- Invoice number
- PO number
- Affected item
- Invoiced amount
- Correct amount
- Supporting information
Example: The AP team contacts the supplier and explains that the specific invoice #inv-105 charges $50 per unit. While the PO #PO-619 specifies $45 per unit for 100 units.
Step 5: Obtain the Correction
As the invoice issue has been sent to the supplier, they will review the issue and provide an appropriate correction based on the circumstances. In this step, you are supposed to receive the correction from the supplier.
This may include:
- A corrected invoice
- A credit note
- A debit note, where applicable
- Supporting documentation or clarification
Example: Supplier finds out that the cost for each unit should be $45, not $50, and issues a new invoice where each of them costs $45 and the total amount is $4,500.
Step 6: Document the Resolution
In this step, you are expected to describe the situation as it was presented to you, how and what was discovered and resolved. In the description, you need to include several pieces of evidence, such as:
- Original invoice
- Corrected invoice
- Purchase order
- Receiving record
- Supplier communication
- Required approvals
Example: The accounts payable support team documents the whole situation and keeps the original mismatched $5,000 invoice. The new corrected $4,500 invoice and the PO that stated $4,500 from the very beginning. Along with that, the supplier’s confirmation that there was a price mismatch and it was entered incorrectly.
This will produce an easily understood document with the main information, which is what the discrepancy was, why it happened and how it was rectified.
Step 7: Approve and Process the Payment
After the discrepancy has been corrected and it is verified, the invoice can now move forward to payment through invoice processing in accounts payable and continue through the invoice cycle. But before processing the payment, run another inspection and make sure the corrected invoice matches the record now.
Example: The AP team runs the final check and confirms:
- PO: 100 units x $45 = $4,500
- GRN: 100 units received
- Corrected invoice: 100 units x $45 = $,4500
The information now confirms that the invoice is consistent with the involved documents and that there is no discrepancy; therefore, it can now be approved and is ready for payment.
Step 8: Identify the Root Cause
Once the issue has been addressed, discuss what went wrong and pinpoint the cause of the error. This will enable you to spot the pattern and deal with scenarios that are similar in later invoices. As you review the problem, consider common problems that include:
- Manual data entry
- Pricing updates
- PO changes
- Receiving records
- Supplier communication
- Internal approval processes
Example: The AP team discovers that the discrepancy happened because the supplier’s team entered the data manually from an outdated price list, which caused the whole issue.
This step helps the finance team identify recurring problems and reduce accounts payable errors in the future. Rather than fixing just an issue, it helps identify the root cause that leads to the issue.
Conclusion
It’s normal for invoice discrepancies to occur when processing an invoice, but when they go unresolved, they can lead to payment delays and payment problems. The first step in this is to check the invoice with supporting documentation. Compare the invoice with the PO. Receipt, contract, and other relevant documents, and the AP team can immediately see what the problem is.
The discrepancy can then be quickly resolved with the cooperation of the supplier. Root-cause analysis can help to avoid recurring discrepancies and ensure accurate transactions. Companies can resolve these issues faster with an established invoice management process and make other factors traceable.
FAQs
Can you give me an example of a discrepancy?
An invoice for a product is $25 per unit, while a purchase order is $20 per unit. This is an example in which a price discrepancy occurred.
How to correct an incorrect invoice?
Contact the supplier, explain, and request for them to provide a corrected invoice or credit note to correct the incorrect one.
What happens if an invoice is incorrect?
An incorrect invoice can cause delays in payment, require further review, or raise compliance issues.
What makes an invoice legally binding?
Whether an invoice is legally binding depends on the terms of the underlying agreement, applicable law, and other factors.
How to legally dispute an invoice?
To legally dispute an invoice, you must inform the issuer within the contractually agreed timeframe.
