Verifier independence is not a new concept. The CFAI adopted the guidance statement on Verifier Independence back in 2005 and there are plans to release an updated version in 2020. In the original guidance statement both the verifier and the investment management firm are required to analyze and reach a conclusion regarding the verifier’s independence. The guidance also provided examples of issues that may or may not impair independence for the verification firm’s consideration.
New to the GIPS 2020 handbook for Firms is a requirement that the investment management firm “MUST gain an understanding of the verifier’s policies for maintaining independence” in addition to consideration of the verifier’s assessment of independence (1.A.39). What should firms expect to see in a verifier’s policy for independence?
For accounting firms, there are various requirements that must be met to demonstrate independence based on the type of engagement being performed and which ruling authority is providing oversight. In most cases the independence guidance will be stricter than that outlined in the CFAI guidance statement. However, not all verification firms are accounting firms and their policies on verifier independence may vary from firm to firm.
At a minimum, the verifier’s policy should address:
- How they identify circumstances that might create a conflict of interest. This includes consideration of the relationship between the verifier and the firm, as well as the nature of the services provided. Does the firm have a process for identifying financial, personal, and business relationships that could impair the verification firm’s independence? Does the policy provide examples of what would be considered a conflict? The 2005 guidance statement outlines that verifiers must not step into a management role, undertake any management function relative to the implementation of and compliance with GIPS, or be in a position to verify their own work. This has not changed with the 2020 version.
- That the professional staff receive ongoing training related to independence requirements and are required to report any potential conflicts to senior management.
- That the verifier will discuss any potential independence issues and how they will be managed with the investment management firm.
If an investment management firm is aware of potential conflicts that could create an independence issue, it’s important to bring those concerns to the verification firm’s attention. Both parties are responsible for ensuring independence is maintained, and according to the guidance statement, compliant firms must retain the ultimate responsibility for deciding whether or not to engage a particular verifier.