Independence and why it's important

The GIPS (r) standards include a provision that deals exclusively with the notion of "verifier independence." The standards recognize that in order to do an effective, independent, and objective verification, the firm must be independent. But "independence," at times, seems a bit like "pornography," from a Potter Stewart perspective (to paraphrase the former U.S. Supreme Court jurist's opinion: I may not be able to define it, but I know it when I see it).

In reading Michael Lewis' Moneyball I came across an example of a violation of independence: it occurred when the Major League Baseball Commissioner (and, at the time, owner of the Milwaukee Brewers) wanted to demonstrate how "rich teams" made it impossible for "poor teams" (such as, coincidentally, the Brewers) to effectively compete. (The fact that the Oakland As (a poor team, of which the book is about) managed to do so wasn't of much interest to the commish).

The GIPS guidance statement on independence attempts to clarify this topic, but sometimes not to the degree we might hope for. We recently ran into a couple cases which, to us, seemed to cross the line. The first has to do with verifiers providing "templates" to their clients: templates for policies and procedures. As one colleague put it, it's a "very slippery slope." Essentially, at what point will the verifier be verifying their own work? (Verifying ones own work, as you might guess, is prohibited and a sign of a conflict). While this service seems to be one that many firms that wish to be GIPS compliant would find highly desirable, it is problematic. We understand that many verifiers offer such a service but we are concerned with its impact on independence and objectivity. (In our verification practice we don't provide templates but, to be completely truthful, have considered doing so because of the competitive disadvantage we find ourselves at at times. If we do provide them, they will have to be basic enough to avoid such an independence conflict, meaning they might not have much value. This slippery slope is one that causes us concern).

The second deals with verification firms that provide software to their clients that assist the client in placing accounts into composites. This, to us, is even more egregious. And while (again) such a service might be desirable on the part of the client, how can the verifier truly claim independence when the firm used software from the verifier to assist them? To offer such a "value added service" has appeal, which may in fact put the verifier at a strategic advantage over competitors that don't provide such software; but it smacks of a violation which should cause both parties to avoid such a practice.

Independence is to be determined jointly by the verifier and their client (i.e., without any oversight). Both should remember that the spirit of the standards should be kept in mind and that this is an ethical issue; they should try to be as objective as possible when considering these matters.