Our GIPS(R) verification business has done extremely well this year: it's become the fastest growing segment of our firm's offerings. And when we replace a verifier we often find that the firm had previously had, in addition to a firm-wide verification, examinations performed. And invariably we ask, "and why do you have these done?" And the responses can vary from "our verifier recommended them" to "well, we have always had them done." And while we don't like to turn business away, we always discourage their use. And why do we do this?
Well, first of all, let's briefly consider the history of verifications. Under the AIMR-PPS(R) you may recall that there were two "levels" of verification: Level I, which is equivalent to a GIPS verification, and Level II, which is akin to an examination. I won't bore you with all of the gritty details of the evolution of verification during the first 3-5 years of the AIMR-PPS. Suffice it to say, it was confusing and controversial.
During the "old days," the "big four" (or should I say, "final four") generally refused to do a Level I; so most of their clients had Level II's done. Along comes GIPS with some changes to what a verification constitutes, and the "big four" decided to offer GIPS verifications (as well as examinations). So, firms that had previously had Level IIs done naturally continued with examinations: makes some sense.
BUT, why do them? As Chuck Tschampion (former co-chair of the AIMR-PPS Implementation Committee) stated in a Journal of Performance Measurement interview several years ago, the Level IIs (read "examinations") have virtually nothing to do with the issue of compliance: they deal with a check of the numbers (i.e., is the firm "cooking their books"). Now, to say that it has "nothing" to do with compliance may be a slight bit of exaggeration, but not much.
It's my general belief that the firm will know whether or no they're "cooking their books." And so they don't need someone to come in and say "it looks clean" or "no, you've got problems." So the motivation to have them done should be based on a market need for such an investment.
It's interesting to note that our most recent survey of the standards confirms that most U.S. firms get examinations done, but elsewhere they're a rarity. E&Y's Martin Schliemann further confirmed in the most recent issue of The Journal that the European market sees little need for examinations.
We are currently bidding to replace a U.S. money manager's verifier who currently examines half of their composites; we suggested that unless they are being asked for examinations by prospects or clients, why continue to do them? The firm was apparently persuaded by our logic, and asked that we only bid on a verification.
Look, we don't want to turn away revenue, especially in this market. BUT, we also don't want to have you spend your money unless there's a good reason for it. So, if you want examinations done, we'll be happy to comply, but we're also comfortable just doing the verification. Such a posture makes verifications more economical and should encourage even more firms to have them done.
Monday, Monday
Monday marks the end of August, which many in the northern hemisphere find a bit upsetting. Oh, well. But more importantly it marks the end of our offer to save an additional $100 on the registration fee for our upcoming Trends in Attribution symposium (TIA). As noted before, we've drastically reduced the rate overall in order to make the event more affordable this year; but this additional savings is even more of a reason to sign up now! And so, if you haven't done so yet, we encourage you to sign up by this coming Monday. Please contact Patrick Fowler (PFowler@SpauldingGrp.com) or Chris Spaulding (CSpaulding@SpauldingGrp.com) for more details.
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Couldn't agree more, and I applaud your position that an examination is not a critical part of the verification process . I believe that your idea is related to the misperception by clients that a verification and/or examination will spot fraud. It's important for clients to understand that GIPS provides a credible process for ensuring that a firm's investment record is fairly and accurately represented by the appropriate composite information. It is entirely reasonable that verifiers begin with third party information and focus on how that information was used to build the performance presentation, as opposed to validating the accounting information itself. Personally, the idea of the old "Level II" verification always struck me as something between an odd idea and a waste of time and money. That may seem harsh, but the key here is to focus on the true value of the verification process. This starts by recognizing that a GIPS-compliant presentation is INFORMATION and not simply DATA. So, the focus should be on the process of turning the accounting data into investment information that helps a client make a good decision regarding hiring an investment manager. Kudos to you on some excellent guidance regarding a critical concept for clients.
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