Quarterly vs Annual GIPS Verifications

The Definition of a GIPS Verification is where the ENTIRE Firm must comply with the GIPS composite construction requirements of the GIPS Standards and the Firm’s processes and procedures must be designed to calculate performance in compliance with the GIPS Standards on a firm-wide basis.

Without getting into the details of how a Firm defines a Prospective Client or how a Firm fulfills its annual GIPS Report distribution requirements, the key topic here is whether a Firm undergoes this a GIPS Verification Quarterly or Annually. Please note there is no requirement on how often a Firm can/should be Verified.

Upon completing the GIPS Verification, the Firm will then receive a Verification letter from the Verification Firm. Additionally, the Firm will then update its GIPS Reports with the most recently Verified data. Please note that this discussion centers around IF a Firm is updating its GIPS Reports with Quarterly data, after the Quarterly Verification.

As a common practice, to lessen the workload on a Verifier, Firms will work out an arrangement with their Verifier to provide data prior to the year-end Verification. Most firms will provide data to be tested for year-to-date through 3rd quarter of the previous year (ie January through September). A Firm may choose to work with its Verification Firm to provide data to the Verifier on a Quarterly basis for testing purposes, but does not consider this to be an actual ‘Verification’. This allows the Verifier to do most of the prior year’s ‘heavy lifting’ before the busy season (Q1 of the following year) hits.

If a Firm is sending data to be ‘pre-verified’, this is NOT considered being Verified Quarterly. This is just a preparation for the eventual yearly Verification, whereas no GIPS Reports are updated and no Verification report is issued.

However, it has been noted that some Firms are going through actual Verifications on a Quarterly basis. Meaning the Firm is receiving a Quarterly Verification Letter AND is updating its GIPS Reports. This process creates issues revolving around other rules associated with the GIPS Standards such as Error Correction and GIPS Report Distribution Procedures that should be addressed.

If a Firm is updating its GIPS Reports Quarterly, then all of the rules associated with Error Correction come into play based on that Quarterly data. According to your Firm’s Error Correction guidelines, thresholds on Material vs Immaterial impacts to the returns should be specified. IF your Firm is updating its GIPS Reports Quarterly, then your Firm must have Error Correction guidelines specified as such.

After your Firm updates its GIPS Reports, and an error is discovered, your Firm should have procedures in place on how it tracks WHO received the erroneous report, and HOW it will provide a corrected report. If a Material Error triggers the re-distribution of the GIPS Report, the Verifier will ask for proof as to how your Firm followed and satisfied its Error Correction guidelines, will ask for logs/proof of how you track the distribution of your GIPS Reports, and will ask for sample reports, logs, etc. Therefore, if your Firm is updating its GIPS Reports Quarterly, then tracking mechanisms must be in place on a Quarterly basis to track WHICH Prospective Client received WHICH Quarterly GIPS Report, etc.

Note on Preliminary vs Final

Updating your GIPS Report with PRELIMINARY information does not absolve your Firm from following its Error Correction guidelines if a Material Error is discovered in the GIPS Report after its distribution. Therefore, if your Firm updates its GIPS Report with Preliminary data, then distributes it, but finds a Material Error that would trigger the Error Correction policy, then your Error Correction guidelines must be followed.

If for some reason, the Firm’s figures changed significantly enough, and the Firm did not provide a corrected GIPS Report, this would fall under the guise of providing false or misleading information to a Prospective Client.

One can see how all of this is complicated enough on a Yearly basis, let alone Quarterly! If a Firm chooses to be actually Verified on a Quarterly basis, and updates its GIPS Report, then all considerations mentioned should be taken into account and acted on accordingly.

As an aside, if your Firm is actually being Verified on a Quarterly basis by receiving a Verification letter, but NOT updating the GIPS Reports, then why get Verified on such a frequent basis? There is no logical benefit to being Verified on such a frequent basis.