What is GIPS verification and what is its scope?

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AcadiFi · Accepted Answer

GIPS verification is a THIRD-PARTY review providing assurance that a firm's performance presentation policies comply with GIPS. It is RECOMMENDED but not required. Many institutional investors require it in RFPs.

VERIFICATION (firm-wide) checks:
1) Whether the firm has COMPLIED with all composite construction requirements on a firm-wide basis
2) Whether the firm's POLICIES and PROCEDURES for calculating and presenting performance are designed to comply with GIPS

Verification does NOT:
- Verify returns of specific composites (that's performance examination)
- Certify individual portfolio accuracy
- Audit or recompute every return

PERFORMANCE EXAMINATION is a deeper, composite-specific review:
- Verifier re-checks the CALCULATION of returns for one or more SPECIFIC composites
- Tests that the composite's underlying portfolios match the composite definition
- Examines input data accuracy

Hierarchy: verification first (firm-level), then performance examination (composite-level) for enhanced credibility.

```mermaid
graph TD
    A[GIPS Verification] --> B[Firm-Wide Policy Review]
    A --> C[Composite Construction Check]
    D[Performance Examination] --> E[Specific Composite Review]
    D --> F[Return Recalculation]
    D --> G[Portfolio Assignment Test]
```

MINIMUM SCOPE: verification covers at least 1 year, typically annually thereafter. Initial verification often covers 5 years.

REQUIREMENTS for verifier:
- Independent from the firm
- Competent in GIPS and performance measurement
- Not tied to any one firm's interests

At Hollowbrook Asset Management, annual verification by Northridge Audit Group confirms firm-wide GIPS compliance, and performance examinations are conducted for the flagship Global Equity and Emerging Markets Fixed Income composites because large pension clients require it.

For CFA Level III, know the DIFFERENCE: verification = firm-level (policies, composite construction), examination = composite-level (specific returns).

What is GIPS verification and what is its scope?

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