GIPS(R) has verifier independence guidance which is intended to ensure that a firm claiming compliance with the Standards is having a verification truly done by an independent third party. But what does this term really mean? We see two sides to it:

First, is there a risk that the verifier will verify their own work. For example, verifiers can’t manage the process to achieve compliance, can’t make decisions relative to becoming compliant, can’t calculate returns, and can’t make decisions about composites. Verifiers also can’t prepare presentations, though we’re aware of a couple who have been known to do this (a nice service, but it violates the rules).

Second, the verifier shouldn’t be doing SO much other work for the client that they’re biased in making their assessment as to the firm’s status vis-a-vis the standards. For example, can a firm who conducts the accounting audit also do a GIPS verification? This is unclear, though we know of at least one of the “big four” firms who won’t do this because they see it as a conflict. And while we’re aware of smaller CPA firms who will gladly take on the GIPS work for their accounting client, we believe that this is wrong. Might the accounting firm’s judgment be impaired when they realize that a negative report might cause their client to rethink who will do next year’s audit?

Independence is to be decided jointly by the manager and the verifier, but both should be thinking about what the right thing is.