Accounting Board Sides with Secrecy Hawks on Classified Defense Spending

A little-heralded accounting authority has for the first time waded into the debate over whether most of the government’s secret spending on national security should be made public.

The Federal Accounting Standards Advisory Board, which issues guidance to improve government financial reporting, last month issued draft guidance on handling the budgets for classified activities.

Seeking to balance the military’s need to protect secret operations against transparency advocates’ desire to scrutinize spending, FASAB sided with the crowd favoring less disclosure.

“In the recent past, information regarding the total amount budgeted for such classified activities was not publicly disclosed,” FASAB wrote in a July 12 proposed statement that incorporates comments from stakeholders in intelligence agencies, Congress and industry. “However, in the last decade, changes were made so that highly aggregated budget numbers for such activities would be made available,” though officials continued to believe that “disclosure of the disaggregated funding details would harm national security interests.”

The statement on preparing the General Purpose Federal Financial Report was requested by the Defense Department back in August 2016 as it was preparing for departmentwide financial audits.

In permitting “certain modifications and disclosures at both the component reporting entity level and at the governmentwide level,” its main conclusion was to allow “financial presentation and disclosure to accommodate user needs in a manner that does not impede national security.”

That permits modifications to budget documents if the changes do not affect net results of operations or a program’s net position.

Most important, some critics noted, the statement “allows a component reporting entity to be excluded from one reporting entity and consolidated into another reporting entity, and the effect of the modification may change the net results of operations and/or net position.”

Modifications of reporting standards are allowed to “prevent the disclosure of classified information,” the guidance said, but future actions should be guided by the statement so that reporting entities would be allowed to “issue unclassified, publicly available financial statements that comply with accounting standards.”

The advisory board in late July and early August held a pair of classified reading sessions confined to agency stakeholders with clearances and “a need to know.”

But the publicly released draft prompted Steven Aftergood, the secrecy specialist who blogs for the Federation of American Scientists, to complain in an Aug. 15 post that the new move by FASAB would allow agencies to “shield” classified programs in a “potentially misleading way.”

Scouring the published comments, he noted that the highly secretive CIA was notably pleased with the new flexibility, arguing “the protection of classified information and national security takes precedence over financial statements.”

But the DOD inspector general disagreed, warning that the new approach “jeopardizes the financial statements’ usefulness and provides financial managers with an arbitrary method of reporting accounting information.”

Also reacting negatively was the nonprofit Project on Government Oversight, which published a critique on its website headlined, “The Pentagon’s New Stealth Bookkeeping.”

“Lots of CIA spending used to be hidden in the Pentagon budget, and it’s still there—but we can’t find it anymore,” a veteran Capitol Hill budget specialist told POGO. He is worried that "the proposed accounting tweak will give the Pentagon free rein to use its so-called ‘unsupported adjustments’—known colloquially as ‘plugged figures’—that have long been used to mask Pentagon spending, dubious and otherwise.”

After it undergoes final tweaks, the statement is scheduled for approval in October by the FASAB’s sponsors—the Treasury secretary, the Comptroller General and the director of the Office of Management and Budget.