What is Verification?

A Brief History

It’s fair to say that verification, like the Standardsthemselves, got their start with the Financial Analysts Federation’s (FAF) initial draft of presentation standards that appeared in the Financial Analysts Journal. In 1990, when the FAF merged with the Institute of Chartered Financial Analysts (ICFA) in 1990 to form the Association for Investment Management & Research (AIMR), later the CFA Institute, the proposed standards became part of the new organization and were renamed the AIMR Performance Presentation Standards (AIMR-PPS®).

The AIMR-PPS introduced the idea of verification, with two levels:

  • Level I, which is equivalent to what we call “verification” under GIPS
  • Level II, which is like a composite examination.2

As with today’sGIPS standards, Level I(i.e., firm-wide verification) was recommended, while Level II (composite examinations) was only made available as an option. We’ll have more to say about Level II and examinations below.

The committee that first worked on the GIPS standards had the benefit of hindsight, and opted to have a single level of verification, holding out composite examinations separately.

What verifications do

Verifications essentially test whether the firm is compliant. While the verifier doesn’t technically state “we have verified XYZ Asset Management and have found that in all material respects they comply with the GIPS standards,” but that’s kind of the implication.

Verifications essentially test whether the firm is compliant. While the verifier doesn’t technically state “we have verified XYZ Asset Management and have found that in all material respects they comply with the GIPS standards,” but that’s kind of the implication.

The reason verifiers don’t make such a declaration is because the Standards are just too complex. And, compliance is a “black-and-white” matter: you either are or are not; there is no “gray area” of compliance.

Under the AIMR-PPS, verifiers were required to make such a statement. This is why the [then] “Big Eight” [now the “Big Four”] CPA firms refused to do Level I verifications, and would only do Level II. As I understand it, they did not want to bear the risk that they might miss something that resulted in the client not actually complying. This was really a liability issue/concern.

The implication is that the firm is, in fact, compliant, if they receive the verification report. The language we currently use is that the firm has:

  • Complied with all composite construction requirements of the
    Global Investment Performance Standards on a firm-wide basis
    for the period Start-Date through End-Date, and
  • Designed its processes and procedures to calculate and present
    performance results in compliance with the Global Investment
    Performance Standards as of End-Date.

Some specifics on a typical verification

When we conduct GIPS verifications, we begin by sending our client a list of items we will need to see. For example:

  • GIPS Policies & Procedures (P&P)
  • Composite presentations
  • 36-monthly returns for each annual period being reviewed
  • Monthly composite and portfolio returns
  • Account membership details, including starting and ending dates
  • List of non-discretionary portfolios, with the reason(s) for being non-compliant
  • List of errors
  • List of recipients of composite presentations.

We review the firm’s P&P to ensure:

  • Everything that is required to be there is there
  • That what is there makes sense; is appropriate
  • That the firm does, in fact, adhere to their policies and procedures.

We review presentations to ensure:

  • Everything that is required to be there is there
  • That the content makes sense
  • And to discover things that will require further review (e.g., wide dispersion).

We will do a great deal of testing, including checking

  • calculations,
  • the timing of account entry and exit
  • treatment of significant cash flows (if the firm has adopted the policy).

Note that the Standards permit the verifier to select samples. These samples can be of composites, accounts, time periods, etc.


When we conduct a GIPS verification, we will issue a preliminary report, or a report of findings, that delineates what we found. If everything is perfect, which admittedly is a rare occurrence, we will be in a position to issue their verification report.

If we discovered anything that requires action (e.g., a missing disclosure on a composite presentation), we will have to wait to provide the verification report until the client has taken corrective action, and provided us with the
revised materials. At times, the client will have a good reason for something we found, in which case no corrective action is necessary

Once the verifier has confirmed that everything has been properlyaddressed,
they will be [almost] ready to provide the GIPS verification report.

The Standards require compliant firms to provide the verifier with a “rep” or “representation” letter, which speaks to their responsibility for providing all information, that the information was accurate and complete, etc. The verification report cannot be issued without the receipt of such a letter.

Why verification is important

We should actually say “critically important.” Compliance can be a challenge, as the Standards are complex and a lot of interpretation is required. With the 2020 GIPS standards, we expect the complexity to only grow, if many of the proposed changes make it through to the final product.

It is simply too easy to make mistakes. We have encountered hundreds of firms who thought they were compliant but actually were not. It’s better to have a verifier discover this rather than a regulator, who might impose fines, or worse. No one needs the embarrassment of it being disclosed that their claim of compliance was fraudulent!

Who can do a verification?

Technically, anyone who is “qualified” and “independent” of the client.

There is an entire GIPS guidance statement that addresses verifier independence.Independence imply means that the verifier will not be influenced by the relationship with the client to consider overlooking infractions; that they will be completely objective when they do the review, and not withhold findings.

As for qualified, there are no rules here. Having followed up the work of other verifiers, we can confess that not everyone who conducts verifications actually knows what they are doing.

Qualified should mean:

  • That the individual(s) who will do the work are thoroughly knowledgeable about the GIPS standards
  • That they understand what is required to be done during a GIPS verification
  • That they understand the different ways returns can be calculated (at both the portfolio and composite level), how to calculate the other statistics required by the Standards (e.g., dispersion)
  • That they have familiarity with the investment industry and understand the different types of instruments, how trades are done, what portfolio accounting is, the roles of custodians and administrators are, etc.

Simply because the verifier may have passed the CFA Institute’s CIPM®
(Certificate in Investment Performance Measurement) is not sufficient in determining whether the individual is truly qualified. In an attempt to help you evaluate the qualifications, we have prepared five questions we recommend you asking the candidates you are considering. If you are already being verified, chances are you know the answer and can decide whether the individual(s) doing the work truly is qualified.

1 When “the Standards” is referenced, in all cases it applies to the GIPS standards, not to any other.

2 The AIMR-PPS’ approach to verification changed a few times over its short life, and the specifics
are a bit convoluted. There was much confusion throughout this period as to what the two levels were. We
don’t believe there is any need to rehash what transpired, except, perhaps, in an academic fashion, ideally
over a drink or two.

3 GIPS Guidance Statement on Verifier Independence.

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