SECRECY NEWS
from the FAS Project on Government Secrecy
Volume 2018, Issue No. 52
August 15, 2018

Secrecy News Blog: https://fas.org/blogs/secrecy/

ACCOUNTS MAY BE "MODIFIED" TO SHIELD CLASSIFIED PROGRAMS

In an apparent departure from "generally accepted accounting principles," federal agencies will be permitted to publish financial statements that are altered so as to protect information on classified spending from disclosure.

The new policy was developed by the government's Federal Accounting Standards Advisory Board (FASAB) in response to concerns raised by the Department of Defense and others that a rigorous audit of agency financial statements could lead to unauthorized disclosure of classified information.

In order to prevent disclosure of classified information in a public financial statement, FASAB said that agencies may amend or obscure certain spending information. "An entity may modify information required by other [accounting] standards if the effect of the modification does not change the net results of operations or net position."

Agencies may also shift accounts around in a potentially misleading way. "A component reporting entity is allowed to be excluded from one reporting entity and consolidated into another reporting entity. The effect of the modifications may change the net results of operations and/or net position." See Statement of Federal Financial Accounting Standards 56, FASAB, July 5, 2018 (final draft for sponsor review):

In response to an earlier draft of the new standard that was issued last December, most government agencies endorsed the move to permit modifying public financial statements.

"The protection of classified information and national security takes precedence over financial statements," declared the Central Intelligence Agency in its comments (submitted discreetly under the guise of an "other government agency").

"It is in the best interest of national security to allow for modification to the presentation of balances and reporting entity in the GPFFR [the publicly available General Purpose Federal Financial Report]," CIA wrote.

But in a sharply dissenting view, the Pentagon's Office of Inspector General said the new approach was improper, unwise and unnecessary.

It "jeopardizes the financial statements' usefulness and provides financial managers with an arbitrary method of reporting accounting information," the DoD OIG said.

"We do not agree that incorporating summary-level dollar amounts in the overall statements will necessarily result in the release of classified information."

"This proposed guidance is a major shift in Federal accounting guidance and, in our view, the potential impact is so expansive that it represents another comprehensive basis of accounting."

"The Board should clarify whether this proposed standard, or subsequent Interpretations, could permit entities to record misstated amounts in the financial statements to mislead readers with the stated purpose of protecting classified information. We believe that no accounting guidance should allow this type of accounting entry."

"We do not believe that... the Board's proposed guidance would effectively protect classified information, comply with GAAP [generally accepted accounting principles], or serve the public interest," the DoD OIG wrote.

The Kearney & Company accounting firm also objected, saying that it would be better to classify certain financial statements or redact classified spending than to misrepresent published information.

"Generally Accepted Accounting Principles (GAAP) should not be modified to limit reporting of classified activities. Rather, GAAP reporting should remain the same as other Federal entities and redacted for public release or remain classified."

If a published account is modified "so material activity is no longer accurately presented to the reader of financial statements, its usefulness to public users is limited and subject to misinterpretation."

"This approach limits the value, usefulness, and benefits of financial statements as currently defined by GAAP. Financial statements of classified entities should remain classified or redacted like other classified documents before release to the public."

"The integrity of current GAAP as it applies to all Federal entities should be retained," Kearney said in its comments.

But the FASAB ultimately rejected those views.

"The Board determined that options other than those permitted in this Statement may not always adequately resolve national security concerns," according to the final draft of the policy, which the Board provided to Secrecy News.

"Without this Statement, there is a risk that reporting entities may need to classify their entire financial statements to comply with existing accounting standards, which would likely result in the need to classify a large portion of the government-wide financial statements."

In practice, the Board suggested, "Modifications may not be needed to prevent the disclosure of certain classified information. Therefore, this Statement permits, rather than requires, modifications on a case-by-case basis."

The new accounting standard is expected to be approved by the FASAB sponsors -- namely the Secretary of Treasury, the Comptroller General, and the Director of the Office of Management and Budget -- by the end of a 90 day review period in October.

Last month, the FASAB issued a separate classified "Interpretation" of the new standard that addressed the policy's implementation in detail. The contents of that document are not publicly known.

The topic of accounting for classified spending has been a challenging one for the Board, said Assistant Director Monica R. Valentine on Monday. "This is the first time we've had to deal with this sort of issue."

HISTORICAL ADVISORY COMMITTEE REPORTS SETBACKS IN 2017

The substantial progress that was achieved in recent years in producing the State Department's official "Foreign Relations of the United States" (FRUS) series was reversed in several respects last year, according to a new annual report from the Department's Historical Advisory Committee.

The FRUS series is required by statute to publish a "thorough, accurate, and reliable" documentary record of United States foreign relations no later than 30 years after the events that they document.

To a large extent, FRUS is dependent on -- and also helps to motivate -- declassification of national security and foreign policy records. Such declassification in turn depends on the cooperation of other agencies who are called upon to review selected documents.

But "The pace of the reviews of FRUS volumes submitted to the Central Intelligence Agency (CIA) and Department of Defense (DoD) and the declassification of documents was disappointing" in 2017, the new annual report said.

The Department of Defense "was unconscionably tardy and inattentive. It completed only one out of eleven volumes submitted for review throughout the entire year."

Because most of the historically significant documents provided to DoD were not reviewed and cleared for release in any form, the FRUS volumes that were planned to contain them cannot be published any time soon.

Likewise, "Although in 2017 CIA did not behave nearly as irresponsibly as DoD, it performed below the expectations produced over the several preceding years."

On the other hand, the Committee found reason to praise the State Department, the National Archives, and the National Security Council. Another bright spot in 2017 was the publication of the long-delayed FRUS supplement on events surrounding the 1953 coup in Iran.

The annual report concluded with several legislative proposals and policy recommendations that the Advisory Committee believes would promote an improved review and publication process.

But it is unclear whether the State Department itself will be receptive to any such improvements. The Department has not been overly friendly to its own History Office (HO), the Historical Advisory Committee (HAC) noted.

"The unexpected and unprecedented decision of the State Department's leadership in December to reject HO's request to renew three HAC members unsettled both the committee and the office," the annual report said.

******************************

Secrecy News is written by Steven Aftergood and published by the Federation of American Scientists.

The Secrecy News blog is at:
      https://fas.org/blogs/secrecy/

To SUBSCRIBE to Secrecy News, go to:
     https://fas.org/sgp/news/secrecy/subscribe.html

To UNSUBSCRIBE, go to:
      https://fas.org/sgp/news/secrecy/unsubscribe.html

OR email your request to saftergood@fas.org

Secrecy News is archived at:
      https://fas.org/sgp/news/secrecy/index.html

SUPPORT the FAS Project on Government Secrecy with a donation here:
      https://fas.org/donate/