Verification is a process by which an independent verifier conducts testing of a firm on a firm-wide basis in accordance with the required verification procedures of the Global Investment Performance Standards (GIPS®).
A verification tests whether a firm’s policies and procedures for complying with the GIPS standards related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance, have been, in all material respects:
- Designed in compliance with the GIPS standards, and
- Implemented on a firmwide basis.
A verification is performed on an entire firm, not on specific composites or pooled funds.
Benefits of Verification
Verifications may provide a firm with the following benefits:
- Additional confidence in the firm’s claim of compliance with the GIPS standards
- Increased knowledge of the GIPS standards within a firm’s performance, operations, and marketing departments
- Improved consistency and quality of the performance related information distributed
- Enhanced internal controls
- Competitive marketing advantage
- Demonstrated commitment to self-regulation and best practices that complement legal and regulatory requirements
A qualified independent third party must perform the verification. To be qualified, a verifier must have certain attributes, including having appropriate professional abilities and experience and a practical level of expertise regarding audit methodology and investment management practices. The verifier must also be knowledgeable about the GIPS standards and applicable laws and regulations regarding the calculation and presentation of performance.
To be independent, there must be no independence issues between the verifier and the firm. The verifier must perform its service in an unbiased manner and must not be testing its own work. Firms are required to gain an understanding of the verifier’s policies for maintaining independence and to consider the verifier’s assessment of independence.
The 2020 edition of the GIPS standards includes a chapter dedicated to verifiers. This guidance was issued so that consistency in testing is achieved across verification firms. The GIPS standards set a minimum level of testing that the verifier must perform.
Careful planning is essential for an efficient engagement that includes testing that is tailored to the firm. Firms should expect verifiers to start the planning process by reviewing the existing GIPS Standards Policies and Procedures and the Lists of Composite Descriptions, Limited Distribution Pooled Fund Descriptions, and Broad Distribution Pooled Funds. Verifiers will also request information supporting composites, pooled funds, and total firm assets. While the entire firm must be subjected to testing, verifiers may use a sampling methodology when conducting testing procedures. Verifiers will conduct testing of the following:
- Total firm assets
- Composite construction, including accounts already included composites, accounts new to composites, and accounts leaving composites
- Accounts excluded from all composites
- Accounts with outlier performance
- Account-level, composite-level, and pooled fund return calculations, including data inputs
- Errors identified during the testing period and their disposition
- GIPS reports, including returns, statistics, and disclosures
- Marketing materials
- Submission of the GIPS Compliance Notification Form to CFA Institute.
At the completion of the engagement, the verifier should provide recommendations for improvements in policies and procedures, operational processes, and internal controls based on the cumulative knowledge gained during the verification.