Errors Can Happen: How to Deal with Them As a GIPS-Compliant Firm

The 21st Annual GIPS Standards Conference will be held 14–15 September 2017 in San Diego, California.

Errors naturally and inevitably occur in any profession. Consequently, professionals in the investment management industry must deal with errors that occur and are discovered. The Global Investment Performance Standards (GIPS®) Guidance Statement on Error Correction addresses the steps that firms claiming compliance with the GIPS standards must take to deal with such errors, whether qualitative or quantitative, specifically those that impact compliant presentations.

In July 2014, CFA Institute conducted a short, anonymous survey to assess how GIPS-compliant firms are creating and implementing their error correction policies and procedures. The goal of the survey is to help participants in the industry gauge what other compliant firms are doing relative to their peers and benefit from this information; 223 firms in 17 countries that claim compliance with the GIPS standards participated. The results yielded interesting information with regard to error correction policies and procedures amongst GIPS-compliant firms, such as whether such policies are applied on a composite-specific basis or firmwide basis, how firms assess materiality, whether the assessment of materiality changes over different time periods or depending on the level of assets under management, and other such matters that are left up to the interpretation and discretion of firms

Based on the survey, 72% of firms indicated that their error correction policies are applied on a firmwide basis. While customization of error correction policies and procedures by composite seems intuitive, there is merit in having a simplistic approach, especially for firms that manage a large number of composites. However, firms have the flexibility to adopt policies and procedures ranging from simple to very complex. These decisions can be based on a number of factors, including (but not limited to) the type and size of the firm, the number of composites, the complexity of strategies, and the number and types of distribution channels.

The Guidance Statement on Error Correction presents firms with a four-step approach for handling errors. Three of these steps are meant for immaterial errors and do not involve redistribution of corrected presentations. However, the fourth approach addresses errors that are deemed to be material in nature and entails that firms prospectively establish policies and procedures that require correction and disclosure of the material error in a revised compliant presentation to redistribute to all existing and prospective clients that received the erroneous compliant presentation. It is, therefore, imperative for firms to have policies in place for tracking who receives compliant presentations.

The survey results were unveiled at the 2014 GIPS Standards Annual Conference, held in Boston in September, where David Yuska, former chair of the United States Investment Performance Committee (USIPC), and Justin Guthrie, CFA, current USIPC chair, shared words of wisdom on this topic and shed light on what they see in their work as it relates to the way that firms deal with error correction.

Yuska and Guthrie outlined a list of best practices for creating and maintaining error correction policies and procedures during their presentation, some of which happen to dovetail with those of the GIPS Standards Guidance Statement on Error Correction:

• Proactively look for errors
• Maintain an error correction log with support for assessment of materiality
• Involve multiple parties in reviewing errors
• Establish reporting mechanisms for communicating to a broader committee or group when errors occur
• Maintain policies for accurately tracking who has received compliant presentations
• Maintain policies for the assessment of errors that do not impact compliant presentations

A poll conducted of attendees at the conference revealed that 91% of the firms represented already have such policies in place. Another poll indicated that 54% of firms involve an oversight committee in assessing and evaluating materiality when errors are discovered. Having such mechanisms in place ensures that firms have a robust policy for addressing errors.

A detailed CFA Institute report on the 2014 error correction survey results is available here.

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Image credit: iStockphoto.com/TommL