Friday, August 27, 2010

"Audited performance figures are what I want" ... but can I get them?" cont'd

Earlier this month I posted about the issue of firms wanting their returns "audited" when they have a GIPS(R) (Global Investment Performance Standards) verification conducted. At that time I mentioned that I had asked a couple of CPA colleagues their thoughts on this. I mentioned at that time how the first responded; here's what the second wrote:

[Accounting firms] shouldn't let anyone say that they were "audited." No accounting firm would let someone present their performance as audited.  We do an examination.  When my clients ask me about this, I respond that they can say that their results were "EXAMINED."      
If you look at the opinion that the accounting firm renders, its heading is "Report of Independent Accountants."  It does not state "Report of Independent Auditors."


We can only call ourselves Independent Auditors when we conduct an audit.  An audit can only be conducted on a full set of financial statements (with a balance sheet, statement of Operations and Cash flows).  We can not (under our professional standards) audit part of financial statements or a performance presentation.

While it's common to hear our verification clients state that their "auditors are here" or that their numbers have been "audited," it's clear that this is technically incorrect. And, it's clear that it's incorrect for an accounting firm to try to distinguish themselves from non-accounting firms who perform verifications by suggesting that with them the client gets "audited returns."

Interesting, I think. Hope you agree.


  1. Stephen Campisi, CFAAugust 27, 2010 at 9:23 AM

    I think you have opened up an important line of inquiry and discussion. To the "layman" the difference in wording between "audit" and "examination" may seem unimportant, but you clearly show that these are as different as night and day. It seems that what investors want to see is really an audit and not an examination. Why? Because while an examination and a verification can only affirm that a manager's performance has been fairly represented according to GIPS procedures and that the firm is in compliance with those guidelines. It does not attest to whether any fraud may have been committed in the posting of those base returns. To have a chance of attesting to the mere presence of assets on which such returns are based, one would need to perform an audit.

    This gets to the necessity of understanding both the question that is REALLY being asked by clients, as well as the reason they are asking the question. What does the client really want to know. Is it only if the composite calculations were performed correctly "assuming the underlying assets are really there in the first place?" Or do you think they also want some assurance that all activities supporting the posting of those base returns were also valid - especially the check that the assets actually exist?

  2. Steve, thanks for your insightful comments. There's confusion in the industry as to what "verification" means: I would suggest that most firms believe that the verifier "verifies the firm's claim of compliance," which isn't what happens. And the use of the term "audited" also has connotations beyond what is actually done.


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