Your first HUD Section 232 audit is likely closer than you think. After closing on a HUD-insured mortgage for a healthcare facility, borrowers must submit audited annual financial statements within 90 days of their fiscal year close. Waiting until that deadline approaches to begin preparation is a common and costly mistake. This guide walks property owners and operators through every step needed to get audit-ready, from organizing your closing binder to preparing a clean opening trial balance. Pease Bell CPAs supports owners and operators through this process with HUD program accounting and reporting services.
Whether you own a nursing home, assisted living facility, or intermediate care facility financed through the Section 232 program, these practical steps will help you meet HUD audit requirements on time and avoid the compliance issues that delay first-time submissions.
What is a HUD Section 232 audit and why does it matter?
HUD Section 232 provides federal mortgage insurance for residential care facilities, including nursing homes, intermediate care facilities, board and care homes, and assisted living facilities. The program is administered by HUD’s Office of Residential Care Facilities (ORCF) under 24 CFR Part 232.
When you finance or refinance a property through the Section 232 program, you accept specific reporting obligations. Borrowers must submit audited annual financial statements that comply with HUD’s Uniform Financial Reporting Standards under 24 CFR 5.801 and 24 CFR 200.36. Operators face separate quarterly reporting requirements. The annual audit confirms that your property’s financial activity aligns with the terms of your regulatory agreements and HUD’s requirements.
The updated Section 232 Handbook, with provisions effective January 5, 2026, applies to all new loan applications and transactional requests. Understanding these HUD audit requirements early gives you the best chance of a clean, efficient audit and avoids compliance flags that can complicate your relationship with your servicer and HUD. Many borrowers in this program operate skilled nursing and long-term care facilities, where coordinated audit and reporting support is especially valuable.
Gather all signed documents before anything else
The first step in preparing for a HUD Section 232 audit is assembling your complete, signed HUD closing binder. Your auditors will request it immediately, and you should have your own copy for reference. The closing binder spells out every responsibility and obligation you accepted as a borrower. If you did not receive a copy at closing, contact your servicer right away, well before audit fieldwork begins.
Your HUD closing binder typically includes:
- Regulatory agreements for both the borrower and the operator
- Mortgage note and related loan documents
- Lease documents between the property company and the operator
- Closing statement with all transaction details
- Surplus Cash note, if HUD converted any debt owed to owners or accrued unpaid interest
Do not selectively choose which documents to provide. Send the entire binder to your auditors. You may inadvertently omit a document the auditor needs but would not think to request, creating unnecessary delays and back-and-forth that push you closer to your submission deadline.
Also gather documentation for any notes receivable or payable that existed at or around the time of closing. Your auditors will need to verify these balances as part of the opening trial balance review, a step that frequently surfaces discrepancies when documentation is incomplete.
How to determine your initial audit period
Your initial HUD Section 232 audit does not cover a full calendar year. The audit period begins on the day you closed on your HUD-insured mortgage and runs through December 31 of that year.
If your closing date falls on or after September 1, you qualify for an automatic deferral. In that case, the initial audit period extends through December 31 of the following year. For example, a closing date of November 3, 2026, would produce an audit period covering November 3, 2026, through December 31, 2027. A properly scoped audit and assurance engagement starts with confirming this period.
Key submission deadlines to keep in mind:
- Borrower audited financial statements: Due within 90 days of fiscal year close
- Operator quarterly statements: Due within 60 calendar days of the quarter end
- Operator fiscal year-end quarter: Due within 90 calendar days of the quarter end
- Operator certification: Operator statements may be operator-certified rather than audited, unless the operator is also the borrower, in which case a full audit is required
Plan backward from your submission deadline. If your fiscal year ends December 31, your audited financials are due by March 31. That means your auditors need your records well in advance, typically by mid-January at the latest, to complete fieldwork and issue the report on time. Missing the 90-day window can trigger HUD compliance flags, so build your timeline with margin.
Prepare a clean HUD opening trial balance
The HUD opening trial balance reflects your property’s financial position after expensing any debt issuance costs from the existing mortgage and just before the refinance transaction. It includes the old mortgage balance and serves as the starting point for your HUD audit period. Getting this right is one of the most critical steps in the entire process.
Here are the key items to address when preparing your opening trial balance:
Reconcile cash, receivables, and asset values
1. Reconcile cash balances to the transaction date. Every bank account associated with the property should tie to a statement or confirmation as of the closing date.
2. Collect outstanding lease receivables. HUD expects the borrower to collect all required lease payments when due. Outstanding receivables at the start of the HUD period raise questions about compliance with lease collection requirements.
3. Record depreciation through the transaction date. This ensures the asset values on your trial balance are current and defensible.
4. Record goodwill amortization through the transaction date, if you have elected the practical expedient. This is easy to overlook when the closing falls mid-period.
5. Account for preclosing costs. If any preclosing costs were paid by a related party, make sure your trial balance includes these deposits as an asset. Omitting them creates an imbalance your auditor will need to investigate.
Address liabilities and related party balances
6. Verify accounts payable. Most property companies do not carry accounts payable, but if yours does, confirm the balance is accurate and adjust if necessary before the audit begins.
7. Accrue interest on the old mortgage. Interest paid at closing on your prior mortgage should be accrued so the expense does not fall within the HUD audit period. Misallocating this expense is a frequent finding in first-time nursing home audits.
8. Update related party balance analyses, including balances with the operator. Related party transactions receive heightened scrutiny in HUD Section 232 audits, so these analyses should be thorough and current.
Handle lease adjustments and revenue cutoffs
9. Handle straight-line lease adjustments. If lease revenue was recognized on a straight-line basis, you may carry an unbilled lease receivable. If the original lease terminates as of the HUD refinancing date and is replaced with a new lease, expense the remaining unbilled balance rather than carrying it forward.
10. Recognize lease revenue through the closing date. Revenue earned before the HUD period should not appear in the HUD-period financials.
One common timing issue deserves special attention. Many property companies record all transactions at month end. If that is your practice, you will need to allocate revenue and expenses to the correct period, either before or after the HUD closing date. When the closing date falls near the beginning or end of the month, proration may not be necessary, but review the timing carefully with your accountant to avoid period-cutoff errors.
Record HUD escrow accounts on the correct books
HUD escrow accounts belong on the property company’s (borrower’s) books, not on the operating company’s books. This is the single most common reclassification issue auditors encounter in initial HUD Section 232 audits, and one of the easiest to prevent.
Many owners record escrow deposits on the operator’s books because the operator handles day-to-day financial management. This makes practical sense from an operations standpoint, but HUD requires these escrow balances to appear on the property company’s trial balance. Your auditors will require you to reclassify them, and HUD will reject your submission if the escrows are reported under the wrong entity.
Review your escrow accounts as soon as possible after closing. Confirm that all HUD-required escrow balances, including replacement reserves, property tax escrows, and insurance escrows, are reflected on the correct set of books. If escrows have been recorded on the operator’s books, work with your accountant to reclassify them to the property company before audit fieldwork begins. Correcting this after your auditors flag it adds time, cost, and unnecessary stress to an already tight timeline.
Common mistakes that delay HUD Section 232 audits
Even experienced owners encounter problems on their first HUD audit. Recognizing these pitfalls in advance gives you the opportunity to address them before they become audit findings.
Documentation and deadline issues
Providing an incomplete closing binder. Missing documents create delays and repeated requests from your auditors. Send the entire binder as a complete package rather than selecting individual items you believe are relevant.
Missing the 90-day submission deadline. Late submissions can trigger HUD compliance flags that follow your property. Mark your deadline as soon as you know your fiscal year-end date and work backward to set internal milestones for document delivery and fieldwork.
Accounting and classification errors
Recording escrows on the wrong entity. As noted above, HUD escrow accounts must appear on the property company’s books. This reclassification issue is the most common finding in initial Section 232 audits and the most preventable.
Failing to prorate revenue and expenses around the closing date. If you record transactions monthly, items near the closing date may land in the wrong period. Confirm the cutoff with your auditor and adjust entries that straddle the HUD closing date.
Not collecting lease receivables before the audit period begins. Outstanding receivables at the start of the HUD period can raise questions about whether the borrower is meeting its lease collection obligations under the regulatory agreement.
Underestimating the time required for audit preparation. First-time HUD audits involve more documentation and more unfamiliar requirements than a standard financial statement audit. Allow extra lead time for gathering documents, preparing the opening trial balance, and responding to auditor questions.
Frequently Asked Questions
How long do I have to submit my HUD Section 232 audit?
Borrowers must submit audited annual financial statements within 90 days of their fiscal year close. For a December 31 fiscal year, the deadline is March 31. Operators must submit quarterly statements within 60 days of the quarter end, except the fiscal year-end quarter, which allows 90 days.
What happens if my closing date falls after September 1?
You qualify for an automatic deferral under the Section 232 program. Your initial audit period extends through December 31 of the following calendar year, giving you a longer reporting period and more time to organize your records before audit fieldwork begins.
Do operator financial statements need to be audited?
Not necessarily. Operator statements may be operator-certified rather than audited, unless the operator is also the borrower. If the operator and borrower are the same entity, a full audit is required for both sets of financial statements under HUD audit requirements.
What financial reporting standards apply to HUD Section 232 audits?
All financial statements must comply with HUD’s Uniform Financial Reporting Standards under 24 CFR 5.801 and 24 CFR 200.36. Your auditor should be familiar with these requirements and the current Section 232 Handbook, which was updated with provisions effective January 5, 2026.
Where should HUD escrow accounts be recorded?
HUD escrow accounts must appear on the property company’s (borrower’s) books, not on the operating company’s books. This includes replacement reserves, property tax escrows, and insurance escrows. Recording them on the wrong entity is the most common reclassification finding in initial Section 232 audits.
How do I prepare the opening trial balance for a HUD audit?
Start by reconciling cash balances to the closing date, collecting outstanding lease receivables, recording depreciation and goodwill amortization through the transaction date, and accruing interest on the old mortgage. Make sure preclosing costs paid by related parties appear as assets, and allocate any revenue or expenses that straddle the closing date to the correct period.
