What is a GIPS® Standards Verification for an Asset Owner?
Verification is a process by which an independent verifier conducts testing of an asset owner on an asset owner-wide basis in accordance with the required verification procedures of the Global Investment Performance Standards (GIPS®).
A verification tests whether an asset owner’s policies and procedures for complying with the GIPS standards related to total fund and composite 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 an asset owner-wide basis
A verification is performed on an asset owner-wide basis and not specific total funds, composites, or portfolios.
Benefits of Verification
Verifications may provide an asset owner with the following benefits:
- Increased knowledge of the GIPS standards within an asset owner’s performance and operations departments
- Improved consistency and quality of the performance related information
- Enhanced internal controls
- Demonstrated commitment to self-regulation and best practices
- Oversight bodies gain additional confidence in the asset owner’s performance
Verifier Qualifications
A qualified independent third party must perform a verification. To be qualified, a verifier must have certain attributes, including 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 asset owner. The verifier must perform its service in an unbiased manner and must not be testing its own work. Asset owners are required to gain an understanding of the verifier’s policies for maintaining independence and to consider the verifier’s assessment of independence.
Verification Testing
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 asset owner. Asset owners should expect verifiers to start the planning process by reviewing the existing GIPS Standards Policies and Procedures and the List of Total Fund Descriptions and Composite Descriptions for any composite that has been presented in a GIPS Asset Owner Report. Verifiers will also request information supporting total funds, composites, and total asset owner assets. While the entire asset owner must be subjected to testing, verifiers may use a sampling methodology when conducting testing procedures. Verifiers will conduct testing of the following:
- Total asset owner assets, total fund assets, and composite assets
- Total fund and composite construction
- Accounts excluded from all composites
- Accounts with outlier performance
- Portfolio, total fund, and composite return calculations, including data inputs
- Errors identified during the testing period and their disposition
- GIPS Reports, including returns, statistics, and disclosures
- Submission of the GIPS Compliance Notification Form to CFA Institute.
At the completion of the engagement, the verifier should provide recommendations for improvements to policies and procedures, operational processes, and internal controls based on the cumulative knowledge gained during the verification.
