external financial statement audit + medicare cost report best practices

julianne kipple, healthcare director
Chase dudzinski, healthcare senior accountant


The few months after a facility’s fiscal year-end are always challenging. From closing the books to preparing for the external audit process to providing information for and completing the Medicare cost report, there is never enough time in the day to get everything done. We have all been through the experience – at the time, we have all said, “next year will be better” and “we will fix the bottlenecks.” Whether or not your facility has made progress in this area, the components below serve as a checklist of ways to plan, prioritize, and complete items throughout the year and before the audit. The goal is to make the year-end process easier for staff, more efficient for auditors and cost report preparers, and make your facility less prone to large audit adjustments and/or make costly mistakes in reimbursement.

Month End Close & Financial Statements

One of the best ways to avoid bottlenecks at year-end is to review your monthly close and financial statement preparation process. If not monthly, at least quarterly, a facility should reconcile all material balance sheet items back to a supporting schedule. Ideally, try to complete your monthly reconciliation schedule in the auditor’s preferred format, so you avoid having to take your reconciliations and input them into the auditors’ format at year-end.

Managing your close process monthly will enable your staff to complete the needed reconciliations and financial statements. Are the monthly board meetings being held at the appropriate time and/or day of the month? How long does it take to close accounts receivable (AR), payroll, and accounts payable? Do we have a month-end close schedule created that includes the closing schedule and gives the accounting staff time to prepare financial statements? Management should have at least three or four business days to review the prepared financials before presenting them at the monthly board meeting. This allows management to ask questions upon review and gives staff the time to make corrections as needed. Managing your month-end process will increase the accuracy and timeliness of your month-end financials, providing management and the board with a better ability to see trends. This enables them to make operating and strategic decisions throughout the year.

Material Accounting Estimates

By far, the most common material audit entries made among hospitals stems from the contractual adjustment, allowance for doubtful accounts, and the Medicare cost report 3rd party payable or receivable. These can significantly change the hospital’s net income and cash flow and therefore are critically important calculations for hospital management.

  1. Contractual Allowance: This is an estimate of how much cash the hospital will collect from their patients’ AR balances and establishing the net realizable value of the AR. Determining this amount is anything but simple because all payor classes will pay the hospital differently. We recommend establishing and monitoring actual contractual percentages by patient type and financial class based on reporting from your software system and/or contracts established by various payors.
  2. Allowance for Bad Debt: An estimate to evaluate the net realizable value of self-pay AR and bad debt based on age. With aging receivables, the expectation is as it ages, the balances will be less likely to be collected from patients. We recommend that hospitals review any self-pay AR for collectability and establish a methodology that accurately values AR and bad debt. Many audit firms will disallow 100% percent of the balances older than 365 days.
  3. Due to/from Third Party: Facilities should also prepare a Medicare and Medicaid interim cost report template at least quarterly. This will help a facility manage cash flow throughout the year by requesting Medicare interim rate changes and settlements as needed and avoid large auditor adjusting journal entries. Many facilities do not prepare an interim cost report, which can create cash flow large swings. With an accurate cost report settlement, management is better informed of their cash position for the year and can make strategic financial decisions on more accurate data. Preparing this entry is not only critical for audit but critical for the hospital’s strategic plan.

External Financial Statement Audit and Cost Report Process

If your facility has followed the recommendations for the monthly close and financial statement process, the external audit preparation time hopefully will already be reduced. However, gathering other information for the audit and Medicare cost report can still be overwhelming. Other recommendations to prioritize work and time during the external audit and Medicare cost report process include:

  1. Upon receiving the request of information from the auditor, meet with staff to identify responsibilities and due dates.
  2. Organize, review and send non-financial information as soon as you can after year-end close. This information should not change after the end of the fiscal year, so there is no reason to wait on pulling this information together as time permits. Some examples include monthly statistical reports, board of director minutes, leases, contracts, internal control checklists, payroll reports, etc.
  3. Accumulate Medicare cost report statistics and information monthly or at least quarterly to increase accuracy, reduce bottlenecks, and update monthly interim templates throughout the year. A few examples include a 96-hour compliance log for CAH, payroll information and FTEs, square footage, Emergency room and rural health clinic time studies, Laundry pounds, etc.

As you can see, if you are able to complete the list above well in advance of the scheduled audit date, it should help reduce stress and bottlenecks, allowing staff to focus on finalizing the correct year-end trial balance. If you can put in the time to review, research and correct accounts as needed, the facility will be in a better position to reduce any surprise auditor adjusting journal entries that can have a material impact to your bottom line and cash flow.


julianne kipple




Julianne Kipple is a Healthcare Director at Lutz with over 10 years of professional experience in the healthcare industry. Her expertise is in accounting and consulting services for healthcare facilities, including outsourced CFO services, Medicare and Medicaid reimbursement, and Medicaid Disproportionate Share Surveys (DSH).

  • Healthcare Financial Management Association, Member
  • American Institute of Certified Public Accountants, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Certified Revenue Cycle Representative
  • Certified Public Accountant
  • Certified Healthcare Financial Professional
  • BSBA in Accounting, with high distinction, Creighton University, Omaha, NE
  • MBA, Creighton University, Omaha, NE




Chase Dudzinski is a Healthcare Senior Accountant at Lutz. He is responsible for providing assurance and consulting services to clients with a focus on the healthcare industry.

  • Audit & Assurance
  • Healthcare Consulting
  • Certified Public Accountant
  • Hospital Financial Management Association, Member
  • Kansas Hospital Association Affiliate, Member
  • MPA, University of Nebraska, Lincoln, NE
  • BS in Accounting, Minor in Finance and Spanish, University of Nebraska, Lincoln, NE


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