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Are GIPS Composite Examinations Worthwhile?

February 11, 2013 4 Min Read Investment Industry
Thomas A. Peters, CPA, CIPM Director, Investment Industry Group

Are GIPS performance exams worthwhileThe Global Investment Performance Standards (GIPS) were created and funded by the CFA Institute to provide an ethical framework for the calculation and presentation of the investment performance history of an investment firm. Many investment firms understand that GIPS verifications are the primary key to gaining access to institutional assets and investment platforms, but wonder if they should also perform composite examinations on key composites.

Your investment firm may only need a verification, but it may make sense to have some composites examined, as well.   You may want to consider:

  • Your clients’ expectations
  • What you are seeing in requests for proposals (RFPs)
  • The questions that consultants are asking
  • What would happen if an error were to later surface in a key composite

Unfortunately there is a lot of confusion on this topic, and not everyone understands the differences between verifications and composite examinations.  From an investor’s perspective, composite examinations can be very valuable.

A verification results in an opinion on an investment firm’s composite construction and the design (not actual functioning) of its processes and procedures. Verifications do not attest as to whether any specific composite is presented, in all material respects, in conformity with the GIPS.  A composite examination, on the other hand, attests whether a specific composite is presented, in all material respects, in conformity with GIPS.

Why does this matter? Let’s draw a parallel to investment funds. Many funds have their books and records maintained by custodians/administrators that obtain SSAE 16 (also called SAS 70) reports. An SSAE 16 report is performed by a CPA firm and attests to the design and function of the processes and procedures (internal controls) relating to their accounting processing. This is similar to a verification, in that it is process and controls based.  SSAE 16s do not attest whether a specific investment fund’s financial statements are presented in conformity with Generally Accepted Accounting Principles (GAAP).

As a result, the SEC has mandated that the financial statements of registered investment funds and many unregistered investment funds (managed by SEC registered investment firms) must also be audited. You can think of a financial statement audit as being similar to a composite examination.  For financial statement audits (composite examinations), an opinion is attesting that the financial statements (composite presentations) are presented, in all material respects, in conformity with GAAP (GIPS).

Why should investment fund financial statements be audited if the recordkeeping process has already been subjected to an SSAE 16? Why does the SEC require this? Although it is important to have well-designed processes and procedures, this does not ensure the accuracy of the financial statements. Because of inherent limitations in internal controls, errors may occur and not be detected.

Kreischer Miller audits many investment funds, almost all of which utilize custodians/administrators that have SSAE 16 reports.  Each year, our audit process uncovers adjustments to numbers and disclosures of some of the funds’ financial statements. This is normal and does not mean that the accounting processes and procedures are not designed or functioning properly. This also does not mean the SSAE 16 reports were wrong.

Although extremely helpful, properly designed controls cannot completely eliminate mistakes.  Errors happen for a variety of reasons, which is why financial statement audits are useful to a fund’s investors and are generally required by the SEC.

Composite examinations are similar to fund audits. When performing a composite examination, errors may be uncovered that may not have been detected in a verification. This is also normal and does not mean the GIPS processes and procedures are not designed or functioning properly.

The SEC’s requirement that investment fund financial statements be audited makes sense.  In a similar fashion, composite examinations can be valuable to both investors and investment firms.


Thomas A. Peters can be reached at Email or 215.441.4600.


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Thomas A. Peters, CPA, CIPM

Thomas A. Peters, CPA, CIPM

Director, Investment Industry Group

Investment Industry Specialist, Owner Operated Private Companies Specialist, Private Equity-Backed Companies Specialist

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