What is the GIPS error correction policy?

Question

AcadiFi · Accepted Answer

GIPS requires firms to establish policies for identifying, correcting, and disclosing material errors in composite presentations. The policy must address materiality thresholds, correction procedures, and communication to current and prospective clients.

**Step 1 — Determine materiality:**
Errors fall into categories:
1. Immaterial — no required disclosure or redistribution (but should be corrected going forward)
2. Material — requires correction and communication to recipients of erroneous presentation

Firms define materiality in writing. Common benchmarks: error > 25 bps in annual return, or misstatement of required data points.

**Step 2 — Correct the presentation:**
- Restate the affected period(s)
- Document what changed and why
- Update internal records

**Step 3 — Communicate:**
For MATERIAL errors:
- Provide corrected presentation to ALL prospective clients who received erroneous version within the last 12 months (or other policy-defined period)
- Disclose existence of material error correction in the subsequent presentation for minimum 12 months
- Notify verifiers

For IMMATERIAL errors: no required action beyond correction in future presentations.

Example: Wentworth Advisors discovers in June 2026 that the 2023 annual return for their Emerging Markets Equity composite was overstated by 47 bps due to a pricing error in three Asian securities. This exceeds their 25 bps materiality threshold.

Actions:
1. Restate 2023 composite return from 14.82% to 14.35%
2. Recalculate 3Y std dev and dispersion
3. Provide corrected presentation to all 17 prospects who received the old version since June 2025
4. Include disclosure 'In June 2026, the firm corrected a material error in the 2023 composite return' on presentations issued through June 2027
5. Inform external verifier (Ashcroft Verification Services)

```mermaid
flowchart TD
  A[Error discovered] --> B{Material?}
  B -->|No| C[Correct future presentations]
  B -->|Yes| D[Restate period]
  D --> E[Notify 12-mo recipients]
  E --> F[Disclose in next 12-mo presentations]
  F --> G[Inform verifier]
```

Policy must be applied consistently and written before errors occur — not designed around specific events.

What is the GIPS error correction policy?

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