Catherine Austin Fitts
Carolyn A. Betts, Esq.
~ February 18, 2019 ~
“There can be no time, no state of things, in which Credit is not essential to a Nation…” ~Alexander Hamilton, “Report on a Plan for the Further Support of Public Credit,” 1795
Table of Contents
I. Introduction
II. Which Securities and Financial Assets Are Affected by FASAB 56?
III. The Rating Agencies
IV. Laws Related to U.S. Monetary and Fiscal Policy
V. FASAB 56: Recent Events Leading Up to FASAB 56
VI. FASAB 56: The Final Statement
VII. FASAB 56: What Is the “National Security” Information That May Be the Subject of Modifications?
VIII. Existing Securities Laws That Have the Effect of Reducing Transparency for National Security Purposes
IX. The Post FASAB 56 World: Who Can Help Assess Credit, Risks, and Price?
X. The Post FASAB 56 World: What Is the Federal Credit?
XI. Conclusion
XII. Links
XIII. Appendices A & B


Investors have experienced challenging times since the change in U.S. Presidential administrations in 2017 initiated a period of reverse globalization with continuous changes in tax, trade, and other U.S. federal policies. Unnoticed in the fray is the October 2018 adoption by the U.S. Congress and Administration of an obscure federal accounting policy that signifies the most important change in the balance of power between the public and private sectors, between overt and covert operations, and between the democratic and fascistic aspects of the American political system: Federal Accounting Standards Advisory Board Statement of Financial Standards 56 (“FASAB 56” or “Statement 56”).

In simple terms, FASAB 56 claims to override the last 230 years of U.S. Constitution and financial management laws and accounting conventions established by the American Institute of Certified Public Accountants (AICPA). The policy allows approximately 170 federal reporting entities to shift amounts from line item to line item, and sometimes even omit spending entries altogether, in their financial statements if “national security” purposes make it necessary to avoid revealing classified information.

Essentially, the federal government has adopted an accounting and public reporting policy that allows a small group of unelected individuals with security clearances and “need to know” access to information to engage in secret processes to establish and maintain separate sets of classified secret books in most federal agencies and “component” entities. It also allows members of this group to purge from the publicly available financial statements anything the group deems to be worthy of national security protection. With the implementation of FASAB 56, when added to existing disclosure exemptions for national security and classified information that apply to the U.S. Treasury, federal agencies, banks, and companies doing business with the federal government and making a market in their securities, the greater part of the U.S. securities market has now effectively gone dark. This development, taken together with the growth of index funds, means that almost no one is “watching the store.”

In our opinion, FASAB 56 is particularly sobering in light of the events of the thirteen months leading up to its issuance. The extent to which mandatory market disclosure has been reduced by Statement 56 and the events that inspired its issuance constitute “material facts” within the meaning of SEC’s Rule 10b-51 to which investors surely are entitled. Consequently, these changes call for global and domestic investors—both individual and institutional—to exercise a new and greater level of due diligence in reaching an understanding of the U.S. Federal credit and its risks.

We believe the changes brought about by Statement 56 will materially affect the accuracy of current methodologies applied in both credit evaluation of issuers and valuations of their securities. Since current market pricing and credit evaluations do not reflect the new risks inherent in non-disclosure of key information to the investment decision, the prudent investor, with this new information in hand, may be embarking upon a lonely journey for some period of time.

In this article, we explain, with reference to other materials available on The Solari Report site, that it is no longer prudent for the investor to rely solely upon primary and secondary securities dealers, the U.S. rating agencies, and mandatory disclosure by issuers to accurately assess the risks and values of certain securities. While we encourage investors to do their own due diligence, we also recognize that FASAB 56 eliminates any hope that the investor will be able to obtain sufficient information to accurately assess the credit and value of his or her holdings of U.S. Treasury and other securities whose values are affected by Statement 56 (i.e., a meaningful percentage of U.S. public and private equity and debt securities).

The central-banking warfare model that has been the basis of the success of the Western world for 500 years is undergoing significant stress. The Bretton Woods system that has formed the structure for global trade since World War II is also unraveling. In this process, the secrecy and conflicts of interest that thread throughout the governance and management of the U.S. federal credit—whether by the government or the related financial institutions, market makers, investors, and contractors—have reached a point where the ancient rule of caveat emptor (“buyer beware”) applies.

You are responsible for doing your own due diligence. We hope the materials that we have assembled in this article and in the 2018 Annual Wrap Up: The Real Game of Missing Money will help you do so.


What securities and other financial assets are affected directly or indirectly by the credit of the U.S. government and market values of its securities? Here is a preliminary list to help investors determine which of their holdings may be affected by a material fact or change like FASAB 56.

U.S. Treasury Bills, Bonds, and Notes

Full faith and credit securities issued directly by the U.S. government that have been recorded on the official books and records, whether in terms of the payment of interest or to “roll over” or pay off at maturity. This category includes short-term T-bills and notes, medium- and long-term Treasury securities, savings bonds, and similar securities.

Official statistics indicate that the following are the holders of the officially outstanding $21.21 trillion of National Debt as of June 30, 2018:

  • U.S. investors: $6.89 trillion—32.5%
  • Federal Reserve: $2.38 trillion—11.2%
  • U.S. government: $5.73 trillion—27%
  • Foreign investors: $6.21 trillion—29.3%

See here: for more on U.S. debt holdings. Note that U.S. government securities (together with, in some cases, full faith and credit securities and Government-Sponsored Enterprise (GSE) securities) are the only securities that can be used for various purposes by certain other entities, e.g., to support bank and broker-dealer reserve requirements and for corporate and municipal bond sinking funds. If any downgrade of these reserve securities were to occur, there could be an automatic bond default or default by banks or broker-dealers in satisfying their statutory reserve requirements, resulting in a cascade of defaults and margin calls throughout the investment economy.

Other U.S. Full Faith and Credit Securities

Full faith and credit securities issued or guaranteed by a government agency and backed by the full faith and credit of the U.S. government. This category includes other securities, including securities guaranteed by Ginnie Mae, for which the U.S. government guarantees unconditional and timely payment of principal and interest. FHA issues debentures that carry the full faith and credit of the U.S.

Mortgage Securities Backed by Secured U.S Insured/Guaranteed Loans

Mortgage-backed securities comprising mortgages guaranteed or insured (usually not 100%) by FHA, VA, and the Rural Housing Administration. These securities are not “full faith and credit” because they are not unconditionally guaranteed (there being conditions to payment and delays in payment), and the guarantees and insurance do not cover 100% of outstanding principal and interest. Their collateral involves, however, direct insurance or guarantees by the U.S. government.

Pools of Unsecured U.S. Guaranteed Loans

Interests in pools of student loans and other similar unsecured federal government-guaranteed loans. These securities are subject to certain risks that are not guaranteed by the federal government, including a lack of collateral and administrator and similar risks (e.g., that the loans have not been serviced or originated properly), but the underlying loans are federally guaranteed if all conditions are satisfied.

Money Market Funds—U.S. Government Only

Units in money market mutual funds that hold Treasury securities, federally secured certificates of deposit, and other short-term securities that are dependent upon federal government credit. These securities have outside, issuer-related risks as well and, therefore, trade at greater discounts than do the underlying securities.

U.S. Government-Sponsored Enterprise (GSE) Securities

Securities issued by traditional government-sponsored entities:

  • Freddie Mac and Fannie Mae securities
  • Connie Lee securities (college loans)
  • Federal Home Loan bank securities (backed by residential loans)
  • Federal Agricultural Mortgage Corporation (Farmer Mac) (backed by farm loans)
  • Securities issued by Federal Farm Credit Banks Funding Corporation (Farm Credit)

GSEs are private companies operating under government charters. Their securities (except to the extent risk has been transferred elsewhere) carry only an “implicit” guarantee of the U.S. government and have relatively high ratings because it is assumed (as was the case during the Financial Crisis for Fannie Mae and Freddie Mac securities and for Farm Credit Program securities during the 1988 bailout) that the U.S. government will make good on the agency guarantee if the agency is unable to do so. In case of a significant U.S. government credit downgrade, it is unlikely that investors in these securities could depend upon the government for payment.

U.S. Insured Deposits

Bank, savings and loan, and credit union deposits guaranteed by the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA). Both FDIC and NCUA have funding through user fees payable by the banks, savings and loans, and credit unions whose deposits they back, but the funding is not sufficient to cover all deposits and, therefore, there is a risk that the U.S. government will be called upon to fund any shortfall in claims by depositors.

Corporate Contractor Bonds and Stocks

Equity and debt securities issued by government contractors reliant for their business upon contracts with the federal government. The largest U.S. government contractors include the typical defense contractors like Lockheed Martin, General Dynamics, Boeing, Raytheon, BAE Systems, Bechtel, and Northrup Grumman; IT and service contractors like L3 Technologies, Hewlett-Packard, Leidos, Booz Allen Hamilton, and CACI; and other companies that are not as associated with defense contracting but for which a large percentage of business involves government contracting, like UnitedHealth, Humana, Verizon, McKesson, General Electric, Accenture, Deloitte, Merck, Corrections Corporation of America, FedEx, AT&T, Berkshire Hathaway, and the State of California.2

Fed Member Bank Bonds, Stocks, and Derivatives

Equity and debt securities of Federal Reserve Bank members, whose capital positions and profits depend upon favorable borrowing rates from the Federal Reserve, which in turn borrows at favorable rates from the federal government. This includes members of the New York Fed and others of the twelve federal reserve banks that provide depository functions for the U.S. government and may be legally liable for any illegalities in the management of and transaction in federal funds and assets.

This category also includes securities of banks and securities dealers whose capitalization depends upon their holdings of brokered deposits or repo agreements backed by Treasury securities.

U.S. Primary Dealer and Exchange Stabilization Fund Agent Bonds, Stocks, and Derivatives

Securities of banks that manage the sales of Treasury securities (primary dealers) and that assist in the New York Fed agent function for the Exchange Stabilization Fund for the Federal Reserve acting as agent for the U.S. Treasury (JPMorgan Chase, UBS, Goldman Sachs). Note that if illegal transactions were conducted over the years following World War II through the Exchange Stabilization Fund, or if there were questionable gold transactions by these same “bullion banks” on behalf of the Federal Reserve, the liabilities of the banks that implemented these transactions could be material. See here: for a list of the primary dealers in U.S. government securities and here for a list of the top fifteen broker dealers based on their assets under management in 2018.

U.S. State and Local Government Municipal Bonds and Notes and Municipal Money Market Securities

State and local governments, particularly those with significant unfunded liabilities, that are highly dependent on funding from the federal budget in amounts in excess of the related federal taxes paid from their jurisdictions and municipal money markets using these notes and bonds.

Corporations and Financial Institutions with Fixed Income Investments—Stocks, Bonds, and Related Insurance Contracts

Any companies with large investment portfolios or pension funds with large holdings of any of the foregoing securities or financial assets.


Clearly, deterioration in the U.S. federal credit continues to debase the spending power of the U.S. dollar.


There are three major U.S. nationally recognized statistical rating organizations (NRSROs) according to standards promulgated by the Securities and Exchange Commission:3

  • Standard & Poor’s (S&P)
  • Moody’s
  • Fitch Group (which is dual-headquartered in New York and London and controlled by Hearst)

These three agencies are responsible for rating approximately 95% of rated securities globally.4,5

The SEC permits issuers of bonds with high NRSRO ratings to use short-form prospectuses and permits money-market mutual funds to purchase only securities with high NRSRO ratings. NRSRO ratings also are used in satisfying net capital requirements by banks; broker-dealers and insurance regulators use credit ratings from NRSROs to ascertain the strength of the reserves held by insurance companies.

Due to the reliance of regulators upon NRSRO ratings, such ratings have become a requirement for many private-sector transactions (e.g., for pension funds and banks) and are the basis for favorable analyst reports in the fixed-income market. Unfortunately, investors have a tendency to rely solely upon ratings rather than also doing their own due diligence in making purchase decisions.

The reputations of the ratings agencies suffered significantly as a result of their failure to do proper due diligence in rating mortgage-backed securities leading up to the 2008-2012 Financial Crisis. The rating agencies earn fees from the issuers. They had clearly bowed to the practices and wishes of the issuers and—no doubt—the wishes of the Fed, the U.S. Treasury, and other federal agencies that engineered the mortgage bubble.

One might rely on their failure to rate outliers whose securities present obviously unacceptable risks (and therefore have “junk” status), but if an entire sector faces the same risk (e.g., reliance on U.S. credit) that has been, traditionally, de minimis, the likelihood that the rating agencies will downgrade a whole class of securities is minimal.

In the words of the Conclusions of the Financial Crisis Inquiry Commission6 (January 2011):

The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval. Investors relied on them, often blindly. In some cases, they were obligated to use them, or regulatory capital standards were hinged on them. This crisis could not have happened without the rating agencies.

To demonstrate the likelihood that rating agencies are no longer able to withstand political pressure, notwithstanding post-Financial Crisis attempts to become more independent, witness what happened when, in August 2011, for the first time in history, Standard & Poor’s downgraded the U.S. credit from AAA to AA+. A furor ensued. In order to mend its relationship with the U.S. government, eighteen days after the U.S. debt was downgraded, S&P asked its then-CEO, Devin Sharma, to step down. Think about this for a minute. The CEO of a rating agency was fired for allowing his rating analysts to issue a perfectly reasonable rating change on the U.S. government’s credit.

Subsequently, the Department of Justice (DOJ) initiated an investigation into S&P’s role in the rating of several mortgage-backed securities that played a role in the 2008 Financial Crisis. In February 2013, DOJ and nineteen states’ attorneys general and the DC U.S. Attorney filed a $5 billion lawsuit against S&P and its parent company, McGraw-Hill, based upon the findings in the investigation, which was settled two years later for $1.375 billion. Neither of the other major rating agencies, which had not downgraded the U.S. credit but had joined S&P in the Financial Crisis debacle, was subject to such a lawsuit. This was a clear warning shot fired to prevent any rating agency from considering any future such downgrades.

In our opinion, no U.S. rating agency can downgrade the U.S. government or issue a watch-list warning on the U.S. federal credit without jeopardizing its existence as well as that of its holding company. Such a rating action could also threaten the physical, financial, or legal security of its executives or board members.

In short, a “prudent man” in the U.S. should not rely solely on the U.S. rating agencies with respect to ratings of U.S. Treasury and related securities.


To understand FASAB 56 and the immediate events leading to its issuance, it is essential to understand the U.S. laws related to U.S. monetary and fiscal policy.

Learning the law related to U.S. federal finances is challenging if you have not gone to law school. To ease the task, The Solari Report commissioned attorneys Michele Ferri and Jonathan Lurie to prepare briefing papers to summarize the legal infrastructure of the U.S. federal financial system.

These papers, including one on FASAB 56, are available in the 2018 Annual Wrap Up: The Real Game of Missing Money at and are available to the public at

Monetary: Federal Reserve

Fiscal: U.S. Treasury

We hope these assist you in understanding the legal infrastructure created by the federal government budget, management, and reporting laws.


Catherine Austin Fitts served as Assistant Secretary of Housing-Federal Housing Commissioner in the Bush I Administration from 1989-1990. At the time, the Federal Housing Administration (FHA) at the Department of Housing and Urban Development (HUD) had a $320 billion portfolio of mortgage insurance-in-force and was originating $50-$100 billion in mortgage insurance annually.

During that period, Catherine led the reform of the FHA financial and reporting operations, working closely with the Government Accountability Office (GAO) and the Office of Management and Budget (OMB). These efforts included designing the relevant titles in the HUD Reform Act of 1989. In creating a new financial model for FHA’s and HUD’s financial operations, the FHA was returned to a financially sound basis during that period. The Administration adopted the model on a government-wide basis under subsequent financial management laws. (See “The U.S. Statutes Creating Modern Constitutional Financial Management and Reporting Requirements and the Government’s Failure to Follow Them” here: In implementing these changes, Catherine became knowledgeable regarding financial management and reporting practices in the U.S. mortgage programs, at HUD, and in federal agencies in general.

After leaving the Administration, Catherine started an investment bank and financial software developer, The Hamilton Securities Group. In 1993, Hamilton won a competitive-bid contract to serve as the lead financial advisor and portfolio strategist for the FHA and served in that capacity until 1997—leading $10 billion of highly successful sales of defaulted mortgage loans from the FHA-“held” mortgage portfolio (i.e., loans as to which FHA had paid off insurance claims by lenders and then taken title to the loans). Hamilton was able to more than double FHA’s recovery rates on these loans and generate $2 billion of increased returns to the FHA Funds. Hamilton’s assigned tasks involved developing significant software tools and databases to make FHA’s portfolio, originations, and markets transparent to decision-makers. Hamilton also developed software that used geographic information system (GIS) applications to map federal resources in counties and Congressional districts.

The highly political termination of Hamilton’s relationship with FHA in 1997 and the seizure, destruction, and ultimate theft of Hamilton’s software tools and databases was followed by a decade of bill-collecting litigation, with Hamilton emerging as the winner and finally settling with the Department of Justice in 2006. Carolyn Betts had been an investment banker with Hamilton, served as general counsel to Hamilton, and continues to serve as general counsel to Hamilton’s successor corporation, Solari, Inc. These events have been described in Catherine’s online book Dillon Read & Co. Inc. & the Aristocracy of Stock Profits, which includes, in the Resources section, an extensive litigation section and supporting documentation. This case study is one of the best documented examples of the extent to which the federal government and supporting media, financial institutions, and private interests will go, no matter the expense, to destroy efforts to bring transparency to the federal credit—in this instance in the mortgage and securities markets.

In 2000, during the litigation period, Carolyn was reviewing HUD-related documents posted on the GAO website and found the testimony of HUD Inspector General Susan Gaffney before the House Committee on Government Reform, Subcommittee on Government Management, Information and Technology on the “Status of Financial Management at HUD” in which Gaffney explained her refusal to certify HUD’s financial statements for FY 1999 as required by law. She described unaccountable voucher adjustments in FY 1998 and FY 1999 of $17 billion and $59 billion, respectively, along with failure of the installation of new computer systems (HUDCAPS) and unsupervised access to accounting systems and information by HUD contractors. Given the financial controls and resources that Catherine had seen put in place, these discrepancies should not have been possible. Her conclusion: the only logical explanation was significant fraud and illegal transactions.

One of the reasons we picked up on this so dramatically was that we had been told in April 1997 by the President of CalPERS, the largest U.S. pension fund, that “we” were going to be moving all the money out of the country in the fall (which was the beginning of federal fiscal 1998). Originally, we assumed that this meant the pension funds and large institutional investors were increasing their allocations to offshore investments, particularly to Asia. After we learned about the $17B and $59B in undocumentable adjustments at HUD, Catherine’s view of the CalPERS President’s statement changed. See the full story here:

Thus began an effort spanning two decades in which Catherine and her companies have worked steadily to bring transparency regarding U.S. federal government financial statements and publicize the government’s refusal, or inability, to comply with the laws that mandate responsible financial management and reporting. The total amounts uncovered and publicly available, yet infrequently reported, are now $21 trillion of undocumentable adjustments in the accounts in the Department of Defense (DOD) and HUD.7 This “missing money,” together with the financial bailouts, are what Catherine has referred to as the “financial coup d’état.”

For a full description of the history of Catherine’s efforts to reform the U.S. federal finances, see “Missing Money: A Personal History—1989 to 2019” in the 2018 Annual Wrap Up: The Real Game of Missing Money

In 2016, Catherine began writing and speaking about the latest and largest addition to annual undocumentable adjustments at DOD in fiscal 2015: $6.5 trillion. Dr. Mark Skidmore, Morris Chair of State and Local Government and Policy at Michigan State University, heard her and assumed that she was mistaken—no doubt she meant $6.5 billion, he thought. Dr. Skidmore accessed the DOD financial reports and discovered that Catherine was correct. The undocumentable adjustments at DOD for FY 2015 were, in fact, $6.5 trillion. Working with his graduate students, Dr. Skidmore offered to do a survey of financial reports at HUD and DOD for the fiscal years 1998-2015 to identify all reports of undocumentable adjustments. At the time, Catherine had identified $12.5 trillion of such adjustments.

After a thorough review, Dr. Skidmore and his students identified a total amount of undocumentable adjustments of $21 trillion, roughly equivalent to the official outstanding U.S. Treasury debt.

In September 2017, The Solari Report launched a dedicated website at to publish Dr. Skidmore’s report on the survey results and all of the underlying documentation from DOD and HUD. The site also includes current and past media coverage of the “missing money” and ongoing report updates and radio and Internet interviews by Catherine and Dr. Skidmore. Dr. Skidmore’s report is available in the 2018 Annual Wrap Up: The Real Game of Missing Money here and is available to the public at the Missing Money site here

On October 5, 2017, Dr. Skidmore’s team discovered that both the HUD and DOD Offices of Inspector General (OIG) had taken down their financial reports from the Internet. After this fact was highlighted in public interviews with Catherine and Dr. Skidmore, the financial reports were discovered in early December republished at different URLS. By way of explanation, the DOD OIG insisted that the reason for the new URLs was that DOD was reorganizing its website. Because The Solari Report had downloaded the reports before publishing its Missing Money website, readers had uninterrupted access.

Although OIG audit reports in previous years had always been made available online without formal restrictions or evident censorship, a DOD OIG report on a U.S. Navy financial statement for FY 2017 then appeared in heavily redacted form—not just the numbers it contained, but even its title! Only bureaucratic sloppiness enabled the readers to see that the report concerned Navy finances (because the censors had missed some of the references to the Navy in the body of the report). A request to the OIG for an uncensored copy was met with the response, “[i]t was the Navy’s decision to censor it, and we can’t do anything about that.” Senator Chuck Grassley also requested that the OIG uncensor the report. Again, the OIG refused.

As explained in more detail in “FASAB Statement 56: Understanding New Government Financial Accounting Loopholes”, FASAB 56 came about just as the Department of Defense was about to announce that after almost 28 years of failing to produce audited financial statements (notwithstanding legal requirements to do so) and the revelations of approximately $21 trillion in unsupported journal voucher adjustments against Treasury, the 2018 fiscal- year clean audit under generally accepted accounting procedures (GAAP) DOD had been promising (again—this was one of a number of successive promises) was not to be. Ernst & Young and other independent public accounting firm auditors announced that the task was hopeless because DOD’s financial records were “riddled with so many bookkeeping deficiencies, irregularities, and errors that a reliable audit was simply impossible.”8

To help the investor better understand the events leading up to the issuance of FASAB 56, The Solari Report has provided a chronology available in flexible table form for the 2018 Annual Wrap Up: The Real Game of Missing Money:

The process of issuing FASAB 56 consisted of the following:

(1) FASAB issued the exposure draft of Statement 56 proposed language (“Exposure Draft”) on December 14, 2017, with comments requested by March 16, 2018.

(2) Upon release of the Exposure Draft, FASAB provided notices and press release to the FASAB email listserv, the Federal Register, FASAB News, the Journal of Accountancy, Association of Government Accountants (AGA) Topics, the CPA Journal, Government Executive, the CPA Letter, the Chief Financial Officers Council, the Council of the Inspectors General on Integrity and Efficiency, the Financial Statement Audit Network, and committees of professional associations generally commenting on exposure drafts in the past (for example, the Greater Washington Society of CPAs and the Association of Government Accountants Financial Management Standards Board).

(3) FASAB followed up this broad announcement with direct mailings of the Exposure Draft to the following relevant congressional committees: House Homeland Security Committee: Full Committee; House Homeland Security Committee: Subcommittee on Oversight and Management Efficiency; House Homeland Security Committee: Subcommittee on Counterterrorism and Intelligence; Senate Select Committee on Intelligence; House Permanent Select Committee on Intelligence; Senate Armed Services Committee; House Armed Services Committee; House Oversight and Government Reform Committee; Senate Homeland Security and Governmental Affairs Committee; Senate Appropriations Committee; and House Appropriations Committee.

(4) FASAB issued a classified exposure draft of the first Statement 56 Interpretation: “Interpretation of Federal Financial Accounting Standards 56: Classified Activities, July 12, 2018, with comments due by August 13, 2018.”

(5) FASAB held two “reading sessions” of the Interpretation exposure draft in a secure room for those it deemed had the appropriate “need to know” and security clearances for two hours on July 18, 2018 (Session One) and for two hours on August 1, 2018 (Session Two). Who attended these sessions? We do not know.

(6) The final version of FASAB 56 was made available to the public on October 4, 2018 (the day that the FBI report on its investigation of Justice Brett Kavanaugh took up the public’s attention9) and is largely unchanged from the Exposure Draft upon which comments were received from various federal agencies and accounting firms.

In a piece on FASAB 56 for Rolling Stone (“Has the government legalized secret defense spending?”), Matt Taibbi captured the timing well in his subtitle: “While a noisy Supreme Court fight captivated America last fall, an obscure federal accounting body quietly approved a system of classified money-moving.” Because the adoption of FASAB 56 required the approval of both sides of the aisle in Congress and the White House, the intimate bipartisan cooperation on the adoption of FASAB 56 contradicts the divisiveness portrayed during this period by the media.

While the initial distribution of the Exposure Draft was wide within the accounting community and Congress, and it appeared in the Federal Register, it garnered no attention from mainstream press that we have been able to identify. The final version of FASAB 56 does not differ greatly from the Exposure Draft.


The adoption of the new permitted accounting treatment or “standard” by FASAB in FASAB 56 would alter the rules for auditing the books of federal agencies, without any approval of Congress, thereby effectively changing the mandates previously enacted by Congress in various statutes that required first 24 agencies—and then all components (or “reporting entities”) of the federal government—to produce unqualified independent financial statement audits.

FASAB 56 could provide a back-door, secret remedy to eliminate the need for reporting unsupported journal voucher adjustments against Treasury in order to balance the books of government agencies: it could allow an agency, under the auspices of “national security,” to make unexplained financial statement adjustments in order to achieve an unqualified audit under FASAB standards. And not only can the adjustments be “unaccountable” in terms of purpose, but they can be secret (i.e., classified) and unlimited in amount. By the time we know for sure what the problems with FASAB 56 might be (given the failure of the government to address the previous $21 trillion of undocumentable adjustments), it could be too late to do anything about them.

In reliance upon FASAB 56, in the future, an agency could not only make secret expenditures or liquidations of assets, but, for “national security” purposes, it could go without explaining (except within a small group of “properly cleared” individuals) why the expenditures or asset transfers were made; it also would not have to report to most of Congress or the public how much such expenditures cost taxpayers or the value of the transferred assets. Presumably, the agency could, in the future, achieve an unqualified audit in which only a selected few unelected officials with top security clearances would view the underlying (and classified) support. We concede that these actions might be illegal and not in accordance with the spirit of Statement 56, but in light of past efforts to hide the truth from taxpayers, is it any wonder we suspect a nefarious purpose?

FASAB 56 applies to otherwise-unclassified financial statements of federal agencies and their components—General Purpose Federal Financial Reports (GPFFR). It provides that, in order to protect classified information from disclosure:

(1) An entity may modify information required by other FASAB standards if the effect of the modification does not affect the net results of operations or net position.

(2) A component reporting entity may be excluded from one reporting entity and consolidated into another reporting entity. The effect of this modification may be to change the net results of operations and/or net position.

(3) An entity may apply Interpretations of FASAB 56 that allow other modifications to information required by other FASAB standards, and the effect may be to change the net results of operations and/or net position.

FASAB 56 also allows modifications to be made to unclassified disclosures, required supplementary information (RSI), and required supplementary stewardship information (RSSI) required by other FASAB statements to prevent the disclosure of classified information. This would include financial statement footnotes, for example.

In other words, any modification may be made if it does not change the net results of operations or net position (#1 above). However, a modification may affect the net results of operations or net position if it results from excluding a component from one reporting entity and consolidating it into another (#2 above) or if it results from applying an Interpretation allowing the modification (#3 above). For example, a modification can be a change in one line item (e.g., a subtraction from the amount of the line item) and a corresponding change in another line item (e.g., the addition of the same amount to another line item), resulting in no net change (#1 above); this would have the effect of mischaracterizing the subject of an expenditure, with no explanation or disclosure of the modification.

The second type of permitted modification is a consolidation modification, which results when a component of a reporting entity is moved out of that reporting entity and consolidated into a different reporting entity (#2 above). As an example, the finances of a division of the Navy (which is a reporting entity) could be deleted from the Navy’s financial statements and moved (consolidated) into the Army’s financial statements. Or, presumably, part of the Army’s finances could be moved into (and consolidated with) the operations of HUD or NASA or any other reporting entity.

It appears that the only permitted modification that has the effect of changing the entire federal net results of operations (as opposed to moving money from one part of the government to another part) is when the modification is pursuant to an Interpretation issued by the FASAB that affects statements other than FASAB 56. Thus, an unlimited number of classified Interpretations not available to the public may be issued by FASAB that have the effect of permitting modifications to federal financial statements that misstate bottom-line numbers, and such misstatements may have a material effect on the reporting entities’ financial statements. Already, one Interpretation applicable to Statement 56 was issued before Statement 56 became final. Was this to ensure a publicly acceptable level of undocumentable adjustments when the inability to complete the new audit was announced? There is no way to know.

Does this mean that FASAB 56 necessarily will result in no net change in federal government balance sheets (i.e., assets and liabilities) and income statements on a government-wide basis unless some future Interpretation expressly provides for an exception? What damage can be done even if there is no net change, government-wide?

In theory and at first blush, it may appear that, in the absence of an Interpretation to the contrary, there would be no net change and therefore no “harm.” However, that would be the case only if no one cares whether a government asset is listed as, for example, gold or land or a claim against a foreign government—or whether an expenditure is listed as a loss on FHA insurance on an apartment complex or an expenditure for food stamps or a bribe to a foreign dictator. There are also fact patterns under which the net position can remain unchanged notwithstanding manipulation of accounts for purposes like the funding of secret mercenary armies.

But if there is no requirement that Congress or the public be informed of the number or amount of modifications or the nature of the expenditures or assets modified, how can anyone know whether even FASAB 56 requirements are being followed? And we wonder whether FASAB 56, in limiting modifications (except those pursuant to Interpretations) to those that do not have the effect of changing results of operations, would nevertheless permit modifications within the same reporting year that, if reported on a date other than the end of the fiscal year, would have the effect of changing net results of operations.

In other words, suppose that in October a reporting entity (e.g., the Department of the Army) were to transfer the title to a $10B satellite to a government contractor, creating an undocumentable journal voucher adjustment against Treasury in the form of a $10B debit against U.S. government assets. As long as, before September 30 of the following calendar year, there is a $10B undocumentable journal voucher adjustment against Treasury in the form of a credit to the balance sheet of the Army or any other reporting entity, there is no year-end net effect on the overall government’s results of operations.

Will the government’s independent accountants—who, in the future, are to issue unqualified audit letters as a result of permitted and undisclosed modifications pursuant to FASAB 56 and future, potentially classified, Interpretations—have access to classified information so that they can certify that the requirements of both FASAB 56 and future Interpretations and their professional obligations under SAS 122 have been satisfied? (See Kearney comments on the Exposure Draft in Appendix B.) It appears maybe not.10 The only reference to this subject in the final Statement (other than disclosure of the six-step process for the issuance of Interpretations) is this:

“[D]uring the audit, the preparer [i.e., governmental reporting entity] would inform the properly cleared auditor whether and how this Statement and related Interpretations were applied. GPFFR modified pursuant to this Statement and related Interpretations would be considered in accordance with generally accepted accounting principles.”

The six-step process as outlined in the FASAB Memorandum of Understanding (MOU) provides for “proper clearance,” including execution of a non-disclosure agreement and demonstration of a “need to know” regarding the classified information. Whether and how many independent public accountants providing audit opinions will be granted the “proper clearance” is left unstated, leaving the reader with only a reference to standard procedures for classified information.

Those who have not experienced the procedures for an independent audit of financial statements by an independent public accounting firm may not know that such a firm depends to a great extent upon various certifications by officers of the audited reporting entity, and the audit opinion is qualified to the extent of such assurances. Therefore, it may be that future auditors of government financial statements will place even greater reliance upon managerial certifications than they ordinarily would because support in the form of records is not made available to them. If auditors do not have access to all classified information taken out of the GPFFR unclassified statement, it seems a fair question how government agencies can be said to have satisfied statutory requirements that they produce audited financial statements. How will independent auditors of such financial statements issue “clean” audit opinions if they cannot follow the procedures required by the AICPA under SAS 122?

Reference to the various comments received by FASAB on the Exposure Draft of FASAB 56 are instructive. See Appendix B for a detailed description of the seventeen comment letters from accounting firms and organizations and federal agencies.


Executive Order 12356, “National security information,” was issued by President Ronald Reagan, on April 2, 1982. According to Executive Order 12356, which set forth U.S. classification policy, information is considered classified if it concerns:

  • Military plans, weapons, or operations
  • The vulnerabilities or capabilities of systems, installations, projects, or plans relating to the national security
  • Foreign government information
  • Intelligence activities (including special activities), or intelligence sources or methods
  • Foreign relations or foreign activities of the United States
  • Scientific, technological, or economic matters relating to the national security
  • United States government programs for safeguarding nuclear materials or facilities
  • Cryptology
  • A confidential source
  • Or other categories of information that are related to the national security and that require protection against unauthorized disclosure as determined by the President or by agency heads or other officials who have been delegated original classification authority by the President.

Any determination made under this subsection must be reported promptly to the Director of the Information Security Oversight Office (ISOO). The ISOO is a component of the National Archives and Records Administration. It receives policy and program guidance from the National Security Council. ISOO is responsible to the President for policy and oversight of the government-wide security classification system and the National Industrial Security Program.

Those with original classification authority are the President, agency heads, and those to whom agency heads delegate this authority. Under Executive Order 13526, which was issued by President Barack Obama in 2009, government contractors and others may play a role in classifying information. Thus, the Order provides:

“[W]hen an employee, government contractor, licensee, certificate holder, or grantee of an agency who does not have original classification authority originates information believed by that person to require classification, the information shall be protected in a manner consistent with this order and its implementing directives. The information shall be transmitted promptly as provided under this order or its implementing directives to the agency that has appropriate subject matter interest and classification authority with respect to this information. That agency shall decide within 30 days whether to classify this information.”

Under Executive Order 13526, automatic declassification is the declassification of information based upon the occurrence of a specific date or event as determined by the original classification authority; or if the original classification authority was unable to specify a date, the expiration of a minimum of ten years from the classification date (unless the original classification authority determines the sensitivity of the information requires classification for a maximum time frame of 25 years).

Only 25-year-old or older records that have been determined to have “permanent historical value” in accordance with title 44, U.S. Code are subject to automatic declassification. Agency heads may exempt 25-year-old, permanently valuable classified records from automatic declassification only when the information contained in them has been determined to satisfy one or more of the exemption categories in section 3.3(b) of Executive Order 13526. Information exempted from automatic declassification under this section remains subject to the mandatory and systematic declassification review provisions of the Order; no information may be classified indefinitely.

Only information that reveals one of the following is exempt from automatic declassification:

  • The identity of a confidential human source
  • Information that would assist in the development, production, or use of weapons of mass destruction
  • Information that would impair U.S. cryptologic systems or activities
  • Information that would impair the application of state-of-the-art technology within a U.S. weapon system
  • Formally named or numbered U.S. military war plans that remain in effect, or operational or tactical elements of prior plans that are contained in such active plans
  • Information, including foreign government information, that would cause serious harm to relations between the United States and a foreign government, or to ongoing diplomatic activities of the United States
  • Information that would impair the current ability of United States Government officials to protect the President, Vice President, and other protectees for whom protection services, in the interest of the national security, are authorized
  • Information that would seriously impair current national security emergency preparedness plans or current vulnerabilities of systems, installations, or infrastructures relating to the national security
  • Information that would violate a statute, treaty, or international agreement that does not permit the automatic or unilateral declassification of information at 25 years

In other words, classification, or the rendering as secret from the public, of information known to the U.S. government is largely within the control of the Executive Branch, with little oversight by the Judiciary or Congress, although we have no way of knowing what, if any, disclosure is voluntarily made to members of Congress (who, as we see below, are not required to obtain security clearances) and their staff members or to members of the Judiciary to the extent necessary for the Judiciary or Congress to carry out their respective Constitutionally-mandated responsibilities.

What about Congressional members? According to the CIA website, all members of Congress have access to intelligence by virtue of their elected positions. They do not receive security clearances per se. Congressional staffers who require access to intelligence in connection with their official duties receive security clearances based on background investigations conducted by the FBI. As a general rule, only committee staffers receive clearances; those in members’ personal offices do not.

While it may be true that members of Congress theoretically have access to classified budget information, classified intelligence reports are routinely provided only to the committees that have responsibilities in the national security area. Members of these committees receive preference from the intelligence community in satisfying their requests on an individual basis. Among the national security committees, the intelligence committees and their members are accorded “preferential treatment.” Committees that do not have national security responsibilities and individual members who do not serve on national security committees may request intelligence support but are typically given a “lower priority.” As for legislation involving national security matters, the intelligence community usually is asked to provide briefings that are open to the entire body. These are ordinarily arranged at the request of the leadership in either house and are held in a secure briefing room on the fourth floor of the U.S. Capitol.

The National Security Act states that Congress must be kept “fully informed” of significant intelligence activities, but many presidents have interpreted this clause to mean they only need to notify the “Gang of Eight” rather than the full membership of the congressional intelligence committees. The Gang of Eight consists of the Senate and House majority and minority leaders, and the chairs and ranking members of the House and Senate intelligence committees.

The leadership in each chamber—the majority and minority leaders of the Senate and the speaker and minority leader of the House of Representatives—are ex officio members of their respective intelligence committees and have access to intelligence held by the committees. Typically, a member of each leader’s staff serves as liaison to the intelligence committee, keeping up with the committee’s activities and serving as a conduit for information to his or her boss. Each of these Congressional leaders also has staff responsible for national security issues who can make independent requests to the intelligence community for support—which may include briefings and/or written analysis.

The two intelligence committees (House Permanent Select Committee on Intelligence and Senate Select Committee on Intelligence) are the repositories of most intelligence shared with Congress. Their offices and hearing rooms are physically located in vaulted areas that meet the CIA standards for storage and discussion of information relating to intelligence sources and methods. They review the annual intelligence budget submitted by the President, oversee the operations of intelligence agencies, and prepare legislation for appropriations to them.

Rep. Adam Schiff (D-CA) is the Chairman of the House Permanent Select Committee on Intelligence, and Rep. Devin Nunes (R-CA) is its Ranking Member. There are twenty-four members on this House committee—fourteen Democrats and ten Republicans. Senator Richard Burr (R-NC) is the Chairman and Senator Mark Warner (D-VA) the Vice Chairman of the Senate Select Committee on Intelligence. Nineteen members serve on this committee—ten Republicans and nine Democrats. As of February 2019, members on one of these two committees and Steny Hoyer (D-MD), as House Minority Leader and member of the Gang of Eight, represented eighteen states and districts in an additional nine states.11 Thus, more than half of the country and all of the largest states are represented by a Member of Congress with access to classified information (if they so choose).

Most national security appropriations appear as a single lump sum in the defense budget. Each appropriations committee (i.e., House and Senate) has a defense subcommittee that holds most of the control over the intelligence budget. Rep. Pete Visclosky (D-IN) in the House and Richard Shelby (R-AL) in the Senate are chairmen of these committees, which have a total of eleven members each.

What does the information in this section tell us?

First, a lot of members of Congress representing investors in many, if not most, states have access to and power to obtain information and exercise oversight or spending authority over intelligence matters and, presumably, classified financial information or financial information involving classified projects and programs. These representatives, particularly the relevant committee chairmen and House and Senate leadership, know the issues involved and the type of information that is behind the “national security” shield and have the wherewithal, if they wanted, to stop an FASAB standard that would mislead the American people.

Given the refusal of Congress to enforce the Constitution and financial management and reporting laws to date, we see no reason why they would start now, other than through the intercession of significant political or investor pressure. It should be noted that the primary source of campaign contributions is increases in capital gains from real estate and stock market value of major corporate and wealthy contributors. Consequently, the conflict of interest between the interests of Members of Congress in raising campaign contributions and any dedication they may have to transparency in the financial statements of major government agencies, contractors, and banks is clear. See the case study involving private prison stock profits in Catherine’s Dillon Read & Co. Inc. & the Aristocracy of Stock Profits here: for a detailed description of how privatization can increase government costs in a manner that generates enormous amounts of stock profits and campaign contributions.

Catherine learned while serving as Assistant Secretary of Housing that through FHA’s General Fund, HUD had what amounts to a put on the Treasury: at the end of each year, since the General Fund was not expected to be operated on a self-supporting basis (i.e., with mortgage insurance premiums covering claims and expenses), HUD merely sent a bill to Congress for the net deficit, with no obligation to account to Congress or provide a breakdown of the losses. Carolyn Betts learned while employed at Hamilton Securities, then FHA’s lead financial adviser, that FHA’s complete second mortgage portfolio was available only on a Lotus spreadsheet kept on a single HUD employee’s hard drive. These observations form just the tip of the iceberg of financial management loopholes available, at least at that time, for hanky-panky by those having an interest in manipulating numbers for the benefit of third-party interests. Catherine has provided links for those who wish to learn more about HUD hanky-panky as an example of the numerous loopholes in the federal system at “Missing Money: A Personal History—1989 to 2019.”

Second, there are a lot of subject matter areas that could, arguably and with some stretch of the imagination, be lumped into “classified” or “national security” or “intelligence” information, particularly in the catch-all category of “other categories of information that are related to the national security and that require protection against unauthorized disclosure as determined by the President or by agency heads or other officials who have been delegated original classification authority by the President.”12 And even government contractors have a shot at seeing to it that information they generate may become classified. On the other hand, at least in theory, most classified information is automatically declassified within ten years; only a select few categories of classified information can remain classified for ten to twenty-five years, and virtually no classified information that a typical investor would consider important in everyday life may remain legally secret for more than twenty-five years.

Third, given the complexity of the workings and finances of the many intelligence agencies, House and Senate intelligence committee staffers, with their required security clearances, have a great deal of power to influence appropriations for intelligence programs and projects and to keep key intelligence committee members informed about relevant issues.

Fourth, the President of the United States, or those who control him or her and the information he or she is given, and the Director of National Intelligence13 exercise virtually complete control over what the public can know or find out about anything the President determines in his or her sole and complete discretion, without any oversight, to be a matter of “national security.”

Finally, with reference to the history of HUD’s hundreds of billions in undocumentable adjustments since FY 1998 and its inability to produce audited financial statements, it is difficult to imagine what “national security interest” could be served by making modifications to HUD and FHA financial statements under FASAB 56. However, such authority has been provided.

Oliver North’s statement alleged by one whistleblower that “HUD is the candy store of covert operations” and the statement by the chief of staff of Senator Kit Bond (chairman of the Senate HUD appropriations committee at the time of HUD’s first undocumentable adjustments and audit failure) that “HUD is being run as a criminal enterprise” come to mind. In light of Catherine’s experience while serving as HUD’s Assistant Secretary-FHA Commissioner that the FHA portfolio included properties for which insurance claims had been paid after no debt service whatsoever had been received from day one (at least once capitalized interest had been used up), is there any reason to believe that HUD’s books, with many billions of dollars of credit and other assets, could not have been used to launder secret and illegal government cash flows? After all, in order to hide a billion dollars in illegal expenditures or the transfer of billions of dollars of assets out of the government, one would have to find a government agency with billions of dollars on its books. HUD’s FHA Fund is just such a potential hiding place.


The U.S. government agency responsible for integrity and full disclosure in the U.S. securities markets is the Securities and Exchange Commission (SEC). The four primary post-Depression laws enforced by the SEC are the Securities Act of 1933 (“Securities Act”) governing the issuance of securities; the Securities Exchange Act of 1934 (“Exchange Act”) governing secondary sales of securities and regulation of public companies; the Investment Company Act of 1940 (“Investment Company Act”) regulating mutual funds; and the Investment Advisers Act of 1940 (“Advisers Act”) regulating investment advisers. Historically, the emphasis of most SEC laws and the rules and regulations promulgated under these acts is one of complete disclosure of material information about securities, the securities markets, and the market participants (advisers, primary and secondary market dealers, and issuers). It is, therefore, a major development in the regulation of the issuance and sale of U.S. securities when the primary enforcer of transparency in the markets promulgates exemptions from disclosure requirements for the stated purpose of protecting U.S. government classified information.

The first SEC exemption for classified information occurred when, on May 24, 1968, SEC promulgated Rule 0-6 under the Exchange Act (17 CFR § 240.0-6), entitled “Disclosure detrimental to the national defense or foreign policy.” Rule 0-6 provides in pertinent part:

(a) Any requirement to the contrary notwithstanding, no registration statement, report, proxy statement or other document filed with the [Securities Exchange] Commission or any securities exchange shall contain any document or information which, pursuant to Executive order, has been classified by an appropriate department or agency of the United States for protection in the interests of national defense or foreign policy.

(b) Where a document or information is omitted pursuant to paragraph (a) of this section, there shall be filed, in lieu of such document or information, a statement from an appropriate department or agency of the United States to the effect that such document or information has been classified or that the status thereof is awaiting determination…. A registrant may rely upon any such statement in filing or omitting any document or information to which the statement relates.

This rule operates as an exemption from SEC rules and regulations that would otherwise require the disclosure in a public filing of material classified information or documents in connection with the public offering of a security (by, for example, a government contractor working on a classified project) and reporting requirements under the Exchange Act applicable to public reporting companies, which require, among other things, the filing of annual financial statements certified by an independent accounting firm (i.e., so-called “audited” financial statements).

To date, the SEC has provided no publicly available guidance on whether this rule prohibiting the public disclosure of information might render a securities prospectus misleading for purposes of the antifraud provisions of Rule 10b-5 (17 C.F.R. 240.10b-5), which states in pertinent part:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

* * * *

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading

* * * *

in connection with the purchase or sale of any security.

Rule 10b-5 and several similar rules permit potential recovery of losses by a purchaser or seller of any security (public or private) who later experiences a loss attributable to a misrepresentation of the counterparty (i.e., seller or purchaser, respectively) or failure of the counterparty to disclose information that—if disclosed or disclosed accurately—would have affected the aggrieved party’s decision to purchase or sell the security. In other words, if the issuer of a security, say, a government contractor that builds weapons systems, fails to provide material information about a key project or provides misleading information about the project that might cause a potential investor in the security not to purchase or sell the security—and the potential investor purchases or sells the security on the basis of the false, misleading, or omitted information, the security value drops, and the holder of the security sells it at a loss—the aggrieved purchaser of the security may be able to recover his or her losses from the issuer under Rule 10b-5.

Query whether, if this government contractor had filed with the SEC under Rule 0-6 a statement from the Department of Defense that omitted materially important information from the contractor’s prospectus, the contractor could use compliance with Rule 0-6 as a defense to the investor’s Rule 10b-5 claim, in reliance on the Rule 0-6 statement that “[a] registrant may rely upon any such statement in filing or omitting any document or information to which the statement relates.” We know of no reported cases on this issue and doubt that there are any, but we can imagine circumstances (e.g., the failure of a company due to the cancellation of a classified production contract involving a major secret military vehicle) under which certain risks are known by the contractor but are classified (whether properly or improperly) and, therefore, cannot be disclosed.

The next SEC rule that comes into play in connection with classified information in the context of private-sector securities is the Exchange Act § 13(b)(3) exemption from requirements that public companies (i.e., companies with securities registered under the Exchange Act that are required to satisfy public reporting requirements under Sections 13 and 15(d) of the Exchange Act)14 keep detailed and accurate accounting records and systems. Specifically, such companies are required under 15 U.S.C. §78m(b)(2) (Section 13(b)(1) of the Exchange Act) to:

[M]ake and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer;
(B) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that—
(i) transactions are executed in accordance with management’s general or specific authorization;
(ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets;
(iii) access to assets is permitted only in accordance with management’s general or specific authorization; and
(iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

Included in the next paragraph of this statutory provision, however, is the following exemption § 13(b)(3):

With respect to matters concerning the national security of the United States, no duty or liability under paragraph (2) of this subsection shall be imposed upon any person acting in cooperation with the head of any Federal department or agency responsible for such matters if such act in cooperation with such head of a department or agency was done upon the specific, written directive of the head of such department or agency pursuant to Presidential authority to issue such directives. Each directive issued under this paragraph shall set forth the specific facts and circumstances with respect to which the provisions of this paragraph are to be invoked. Each such directive shall, unless renewed in writing, expire one year after the date of issuance.

This exemption (about which, we think, few securities analysts and attorneys outside the defense establishment are aware) appears to provide for a get-out-of-jail-free card to allow government contractors, in particular, to keep secret accounting records and file financial statements that fail to include all information that would otherwise be required in annual and quarterly reports, proxy statements, and other SEC filings. The only catch, it seems, is the administrative hassle of annually renewing the federal department or agency directive.

In February 2006, President George W. Bush delegated the exemption authority under Section 13(b)(3) of the Exchange Act to the Director of National Intelligence (then John Negroponte), thereby shrouding the government defense establishment in further secrecy. Now, in light of the issuance of FASAB 56, the SEC’s mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation seem far from reach.

It is not clear, however, how a public company could make material alterations of its financial records in accordance with Exchange Act § 13(b)(3) or Exchange Act Rule 0-6 and still (in the absence of a private-sector policy analogous to SFFAS 56 in the federal government sector) fulfill its Exchange Act obligations to file annual audited financial statements. It is possible that, as suggested in the Kearney & Company comment letter on the SFFAS 56 Exposure Draft (see Appendix B), the public accounting firm issuing a clean audit opinion on such a contractor’s financial statements does so through the application of AICPA’s AU-C Section 805, Special Considerations—Audits of Single Financial Statements and Specific Elements, Accounts, or Items of a Financial Statement with reference to Statement on Auditing Standards (SAS) No. 122, “Preface to Codification of Statements on Auditing Standards, Principles Underlying an Audit Conducted in Accordance With Generally Accepted Auditing Standards.”

SAS 122 was issued in October 2011, effective for financial statements after December 15, 2012.15 AU-C No. 240 is entitled “Considerations of Fraud in a Financial Statement Audit.” The scope of this standard is stated as follows:

This section addresses the auditor’s responsibilities relating to fraud in an audit of financial statements. Specifically, it expands on how section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, and section 330, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained, are to be applied regarding risks of material misstatement due to fraud.


As we stated in Section III, we do not believe a “prudent man” would rely solely on the U.S. rating agencies regarding the U.S. federal credit. We should also explain why a “prudent man” would not rely on the media, issuers, dealers, or financial institutions either.

We have seen that FASAB 56 was first proposed in the Federal Register in December 2017. Yet, with the exception of ongoing coverage by The Solari Report, a special report and update from Dr. Skidmore, an article by Steven Aftergood of the Union of Concerned Scientists, and Matt Taibbi’s Rolling Stone article in December 2018, there has been nary a peep from those who should have an interest in an accounting standard that could have the effect of making material misstatements of the financial operations and position of every agency of the federal government. That fact, in itself, should be a warning that investors are on their own in doing due diligence on their investments where risks of financial solvency and stability of the federal government are concerned—that is, for many, if not most, of the equity and particularly debt securities and derivatives available in the market.

We have also seen that the traditional SEC-required disclosure, in public securities offerings as well as annual and quarterly reports and proxy statements of public companies, should be viewed with a degree of caution where securities issued by federal government contractors and banks are concerned, because classified information relevant to the investment decision may have been excluded with the blessing of the SEC under Exchange Act Section 13(b)(3) and Rule 0-6. Federal contractors, however, may include more than the obvious military-industrial complex contractors like Lockheed Martin and SAIC. This also includes the banks (like JPMorgan Chase, Goldman Sachs, and others) that, largely without wide disclosure of the fact, act as agents of the U.S. government in the gold markets, with respect to the Exchange Stabilization Fund, and otherwise in government financial market interventions.

From the 2008-2012 Financial Crisis, we learned that the investment banks (like Goldman Sachs) traded in mortgage-backed securities to benefit their own private interests, even to the detriment of their investor clients who were counterparties in the same transactions.16

With all the fanfare accompanying legislation purportedly addressing the “too big to fail” phenomenon witnessed during the Financial Crisis, since that time, the big banks have only gotten bigger. Several investment banks (Merrill Lynch and Goldman Sachs, in particular) have become banks, thereby being able to borrow at the Fed’s window and take advantage of FDIC insurance while engaging in proprietary transactions for their own accounts. We see no sign of a “come to Jesus” moment in the financial sector that would lead us to believe that the major financial institutions are now generally dedicated to integrity and transparency, let alone when it is contradictory to their self-interest.

Threats to the dominance of the U.S. dollar as the world’s reserve currency make it more likely that the U.S. making good on its guarantees will require the Federal Reserve to print more money, leading to a significant debasement of the U.S. dollar. U.S. military dominance is a major factor in holding up the value of the U.S. dollar, but this is not a politically correct factor for a primary or secondary dealer to incorporate in its analyses of credits of either direct U.S. obligations or obligations dependent on the U.S. credit, especially when such military dominance depends on secret weaponry and covert operations.

Consequently, the investor is advised to rely on his or her own due diligence as opposed to the assessments of third parties, be they media, dealers, rating agencies, or issuers.


What Is Sovereign?

According to Wikipedia, the word “sovereign” is borrowed from the Old French soverain, which is ultimately derived from the Latin superānus, meaning “above.”

“The roles of a sovereign vary from Monarch or Head of state to head of municipal government or head of a chivalric order. As a result, the word sovereign has more recently also come to mean independence or autonomy…. The sovereign is the autonomous head of the state.”

“Sovereignty is the full right and power of a governing body over itself, without any interference from outside sources or bodies. In political theory, sovereignty is a substantive term designating supreme authority over some polity.”

A government or sovereign bond is a bond issued by a national government. Government bonds are typically denominated in the issuing country’s currency. Consequently, the government can never be forced to default, because it can simply create more currency to fund payment of principal and interest.

One of the important characteristics of state sovereignty has been Westphalian sovereignty—the principle that each state has exclusive sovereignty over its territory. Established by the Peace of Westphalia in 1648, this principle means that a sovereign government has a monopoly on the use and exercise of physical force within its jurisdiction.

There is an important question that investors must ask: What does it mean to the credit of U.S. Treasury securities that the U.S. has been privatizing parts of its military and intelligence function? It means that the U.S. military and enforcement authorities no longer maintain a monopoly on force within the U.S. jurisdiction. Rather, in our opinion, the number of parties that can and do kill with impunity on behalf of both governmental and non-governmental agencies and parties has been growing faster over recent decades than the U.S. GDP—and there is certainly a relationship between these two trends.17 Economic performance is driven increasingly by force. With the development and implementation of drone and robotics weaponry, the potential impact will be far-reaching.

Who Hires and Fires the Deputy Assistant Secretary of Housing-Single Family at the U.S. Department of Housing and Urban Development?

As described earlier, the FHA, an agency within HUD, is a mortgage insurance operation, generally divided into two funds. The first is the Mutual Mortgage Insurance (MMI) Fund, which funds the single-family residential mortgage insurance originated by FHA. Officially outstanding mortgage insurance in force in the MMI Fund as of fiscal 2018 was approximately $1.1 trillion, with the fiscal 2018 budget requesting authority to issue $400 billion in new mortgage insurance.

The management of the single-family operations at FHA is traditionally undertaken by the Deputy Assistant Secretary of Housing-Single Family who reports to the Assistant Secretary of Housing-Federal Housing Commissioner who reports to the Secretary of HUD. Both the Secretary of HUD and the Assistant Secretary of Housing-Federal Housing Commissioner are Presidential appointees. They are nominated by the President and approved by Senate confirmation after an extensive FBI background check.

The Deputy Assistant Secretary (DAS) of Housing is traditionally recommended for appointment to the Secretary by the Assistant Secretary of Housing, reviewed and approved by the White House, and then appointed by the Secretary after a background check.

When Catherine became Assistant Secretary of Housing in 1989, one of her first jobs was to review and recommend the people for four main deputy positions, including the Deputy Assistant Secretary of Housing-Single Family. One of the resumes forwarded to her by the transition team was for Ronnie Rosenfeld.

Catherine knew Ronnie from her time serving on one of the boards at The Wharton School. After an initial interview, she invited Ronnie to lunch and asked him the most important question. Why was someone with such a successful career in real estate and finance interested in serving as Deputy Assistant Secretary to reform what was at the time a very troubled operation? Although required by law to be financially self-sustaining, the FHA single-family fund was instead losing $11 million a day—a significant amount at a time when the officially reported single-family mortgage insurance in force was approximately $300 billion.

To this day, Catherine remembers Ronnie’s answer. He spoke about how his family had come to America—and thanks to the opportunities we enjoy here—had done very well. Now he wanted to give back. The next day, Catherine forwarded a recommendation to then HUD Secretary Jack Kemp for Ronnie Rosenfeld to be appointed the DAS-Single Family.

Shortly thereafter, Catherine received a call from the executive director of the National Association of Homebuilders (NAHB). The message said it was urgent. Could he and the president of NAHB meet with her as soon as possible? Soon enough, Catherine found herself in a small temporary office (she had not been sworn in yet, having just arrived at FHA) with the executive director and president of NAHB.

The NAHB president was quite upset. It seemed, she said, that Catherine had made a terrible error. She had nominated Ronnie Rosenfeld to be DAS for Single Family. That appointment, the president said, was in fact the NAHB president’s to make—the DAS for Single Family essentially reported to her. She did not seem to be aware that the growing HUD scandals that were part of the savings and loan (S&L) crisis and the Iran-Contra scandal signaled a new day at HUD. In the meantime, Catherine was beginning to understand how the MMI Fund had arrived at the point of losing $11 million a day and not being in compliance with existing federal financial management laws.

Catherine explained that the new administration was planning on running things by the book and that the DAS for Single Family was going to be appointed by the HUD Secretary with approval of the White House. Catherine was only going to recommend to the Secretary candidates qualified to do an excellent job based on merit. Washington lobbyists needed to understand that the line management of a $320-plus billion government insurance program would report to government officials—not to the president of the National Association of Homebuilders.

The president stood up, pointed her finger closely at Catherine’s face and, using the F-word liberally, explained, “I will have you fired.” Catherine looked her in the eye and said, “You know you probably can, but it will take you a while. In the meantime, I am going to get this place on a sound financial footing.” Catherine then picked up the phone, called security, and requested a security guard to physically evict the NAHB president from the building. Inspired by the call, the executive director quickly hustled the president, spitting and yelling, out of the office and down the hall to the elevators.

Before Ronnie arrived, Catherine bounced the fellow who was processing land development deals with the company owned by the president of NAHB from the Single Family office and, with the assistance of now-Deputy Assistant Secretary of Housing Ronnie Rosenfeld, shut down the program. Catherine was fired approximately eighteen months later, in part for a refusal to respect or implement illegal orders, but by that time FHA was on a sound financial footing—which was not to last.

Catherine had experienced some of the basic truths of sovereignty.

For a government to have sovereignty, it must have information sovereignty. The President of the United States must be able to call the Prime Minister of England and have a conversation without eighteen intelligence agencies and telecommunications companies recording and sharing it with numerous banks, private companies, and media outlets. A sovereign government’s information and payments systems need to be controlled by loyal government officials rather than private corporations and banks that can profit from funds being moved illegally out of or laundered through the information systems or securities being issued without being recorded on the government books.18

For a government to have sovereignty, it also must have financial sovereignty. If no one accepts its currency or will buy its bonds, a government cannot provide the basic operational capacity it needs to run and maintain control within its borders. If a country practices deficit spending and becomes highly leveraged, it is ultimately controlled by the owners of its central bank, its creditors, and the dealers who manage its bond markets rather than by its citizens.

The president of the NAHB and Catherine disagreed in 1989 regarding whether FHA was part of sovereign government or simply a rich trough for the feeding of insiders. The reason the FHA Single-Family Fund was losing $11 million a day, although required to be run on a self-sustaining basis, was because it had lost its sovereignty.

Indeed, some of Catherine’s greatest struggles involved getting basic financial data about the operations, including from the defense contractors19 who ran HUD’s IT and payments systems and would refuse requests for basic financial data. Certainly, FASAB 56 has great potential to allow such contractors even greater protection with respect to their control of agency resources and their financial relationship with both the government and shareholders.

In 2000, Catherine met with the chief of staff to the Chairman of the Senate Subcommittee that oversees HUD appropriations. The mortgage bubble was in full bubble mode. The staff member asked Catherine what she thought was going on at HUD. Catherine deferred and asked what the chief of staff thought was going on. The response was, “HUD is being run as a criminal enterprise.” This was after billions of dollars started to disappear from HUD, with $17 billion and $59 billion of undocumentable adjustments in fiscal 1998 and 1999.

HUD is run on a matrix structure with the majority of operations handled by large defense contractors, New York Fed member banks, the U.S. Treasury, and the Department of Justice. HUD was indeed being run as a criminal enterprise—and those entities were intentionally running it as a criminal enterprise. Further outsourcing and privatization can only be expected to make things worse, not better.

The bailouts during the 2008-2012 Financial Crisis were in amounts that were several multiples of what would have been needed to pay off all the residential single-family mortgages in the country. How could that happen, you might ask? Among other things, it could happen because the federal agency responsible to lead policy and regulation for the United States was not run as a sovereign government agency and was handing out credit and booking undocumentable adjustments with abandon.

In 2003, Catherine challenged a retired senior civil servant who had held a senior position at HUD to find an existing member of the civil service at HUD who understood how the financial operations then worked. He accepted the challenge and had to buy Catherine dinner when he lost. It turned out that the banks and corporations were in complete control, he said. There was no government official or employee who understood the operations or finances, let alone was in a position to govern or manage the private banks and contractors at their tasks. He was stunned. HUD had achieved a full privatization operationally without anyone knowing it. Not surprisingly, the housing bubble continued to expand while HUD finances and financial systems remained—perhaps not so mysteriously—a complex, near-impossible-to-understand mess.

Indeed, as you read this, we are being regaled by media reminding us how government is inefficient and telling us that we should let corporations run more government operations.

As you read the 2018 Annual Wrap Up, we encourage you to step back and see the big picture of where we are. The more power private banks and corporations get to run the U.S. government, the more money goes missing, and the larger and more secretive the National Security State grows.

In essence, the U.S. government is like a large double-decker bus. The friendly driver wears a hat and has a big steering wheel. That steering wheel, however, does not connect to the bus wheels. On the lower level, there is another driver with another steering wheel that does indeed connect. That wheel is controlled firmly by the private banks, corporations, and contractors who run the federal government and fund the campaign contributions for Congressional and presidential campaigns.

The passengers get angry at the friendly driver every four or eight years and vote in a new friendly driver. And nothing changes. The situation could change—but that would require cutting off the funding to the real driver, which, of course, threatens the real system and the existing cash flows that generate “fees for your friends” and levitate the corporate profits on U.S. equity markets.


The collapse of U.S. sovereignty that was under way when Catherine threw the president of the NAHB out of FHA is now complete with the issuance of FASAB 56. This is a material event in the context of investor and citizen risk.

The U.S. government is maintaining secret books through a secret process without any independent verification that those with proper clearances are following the rules that supposedly authorize this secrecy. The people making these decisions are, for the most part, secret. An obscure accounting policy overrides the U.S. Constitution and federal financial management and securities laws. Since the banks and corporations that have run the U.S. government outside those laws for twenty years now have even more power, it is not clear on what basis we would presume they will follow the new set of rules issued to institutionalize their refusal to follow the old set of rules.

There is a simple way to cut through the complexity of what is happening. The U.S. government is not a sovereign government. It does not have information sovereignty. It does not have financial sovereignty. It does not have operational sovereignty. And it has accumulated undocumentable transactions from fiscal 1998 to 2015 at two of its 24 agencies equal to the amount of its officially reported outstanding debt: $21 trillion.

Sovereign Bonds

This brings us to the question of the outstanding U.S. debt. The official amount of outstanding U.S. Treasury debt is now $22 trillion and rising quickly.

U.S. Treasury debt grew by 6% in 2018. It is expected to grow by 8% in 2019. That is despite many years of what is being called an “economic recovery.” If the economy slows or goes into recession, as it inevitably will, the debt growth will accelerate. If unfunded liabilities are added, the picture deteriorates further.

One important question is, who will buy this debt? As described in Section II and at our tables at “Contractors, Investors, and Dealers” in the 2018 Annual Wrap Up, U.S. investors own 33% of the debt, the Federal Reserve Bank owns 11%, and the U.S. government owns 27%—for a total of 71% that is owned domestically. That leaves 29% owned by foreign investors, who are currently net sellers. In addition, the next two years will also see a significant volume of corporate bond maturities, significantly increasing corporate refinancings. Given high global government debt levels, the competition for capital is fierce.

Another question facing investors is, what exactly are they buying? If the U.S. government is no longer a sovereign government (and indeed, aggressive plans for further privatization underscore the fact that there is no possibility of that changing in the near and intermediate future—quite the contrary), what does it mean?

It means that a U.S. Treasury bond is not a sovereign bond. It is something else. The term “sovereign” no longer applies.

So, what is it? It is a bond issued by a governmental shell that is secret and whose operations are run by private corporations and banks that fund—or whose investors, lawyers, and lobbyists fund—the campaign contributions that elect the politicians who serve in Congress and the White House.

We have no way of knowing for sure whether the assets financed by bonds issued by this government continue to be owned by the government, thus providing some form of collateral as a credit matter. We cannot say whether the assets financed by government bonds are being laundered out to private corporations in a manner that supports a high U.S. domestic stock market and the resulting campaign contributions. That possibility would certainly help to explain the dramatic outperformance of the U.S. stock market relative to world markets, however.

Is the U.S. government a government, or rather a tax collection operation that is also a marketing shell for the U.S. Treasury financing operation?

In New York State, when Catherine was on Wall Street, they used to call a certain class of bonds “moral obligations.” That was because it was considered essentially a political fait accompli that the New York State legislature would vote appropriations to pay debt service. But the State did not have a legally binding obligation to do so—the debt was a “moral obligation,” subject to the future will of the legislature. Presumably, the legislature could be expected to appropriate the necessary funds because members did not want the State’s bond market access to come to an end.

For twenty years, Catherine has steadily referred to unaccountable adjustments by HUD and DOD and bailouts—$21 trillion in missing money combined with $24-plus trillion in bailouts—as “the financial coup d’état.” Now, the financial coup d’état period is coming to a close.

With the squeeze in the bond market upon us, as the amount of outstanding debt grows at an accelerating rate, the U.S. and global investors are entering a new phase. Think of this as a leveraged buyout. The investors who can afford the biggest positions in Treasury bonds and can afford to buy new ones are likely the very groups that engineered the financial coup.

This means governmental control is likely being purchased with the money stolen from and through the government. As Catherine always says, “crime that pays, is crime that stays.” So now, investors have a “moral obligation” bond secured by a secret government being run as a criminal enterprise.

There are two reasons most investors assume that such a Treasury bond has financial value. The first is that the U.S. military is considered the strongest in the world. Consequently, a nuclear arsenal should count for something on the global chessboard, despite the unraveling of the global trade system. Second, U.S. Treasury and related debt is denominated in dollars, and the Federal Reserve and, if necessary, the U.S. Treasury can simply create as many dollars as they want—there is no need to default.

The problem is that nowhere in this system are there internal controls that would require economic optimization or fundamental productivity. It has been cheaper to buy people’s political loyalties on a pay-as-you-go basis, using, among other tools, control files made economic by digital technology and media control. The price of secrecy and privilege, however, is that, over long periods of time, they subject the system to ever greater rates of entropy. The more uneconomic and entitled the system becomes, the more it depends on force rather than trust. The result is the downward spiral in performance that is now happening concurrently with an upward spiral in debt.

Secret Funding for Secret Armies

This brings us back to our last condition of sovereignty—Westphalian sovereignty. With very little fanfare, over the last three decades, the United States of America has made a significant investment through its intelligence and defense budgets in building private mercenary armies. Those private armies have been lobbying aggressively to be allowed to replace the U.S. Army in the Middle East and in hot spots around the globe.

Private armies are now a financial constituency that lobbies for profitable opportunities to use force that generate U.S. corporate and bank profits and capital gains and the resulting campaign contributions.

If you look at the covert operations happening around the United States—including shootings, assassinations, false flag events, and likely weather warfare—it is clear that United States military and federal enforcement and state and local governmental subdivisions no longer maintain a monopoly on the use of force within U.S. borders.

Here is what Catherine wrote to one reporter after FASAB 56 was adopted quietly while the country was in an uproar over the Kavanaugh Supreme Court confirmation hearings:

“The story is simple and obvious. What is it about secret financing for secret armies that you do not understand? The U.S. government just officially changed its governance model from a constitutional republic to fascism through an obscure accounting policy. No need to bother with a Constitutional convention.

The U.S. Treasury is free to tax and then borrow from our pension funds and global and domestic investors and then transfer the money and assets financed and technology found or created without limit, compensation, or oversight to private corporations and investors. This is privatization by the ‘just do it’ method. Think of this as the extension of the bailouts to a permanent open bailout structure.

The White House and Congress just opened a pipeline into the back of the U.S. Treasury and announced to every private army, mercenary, and thug in the world that we are open for business. Every mercenary on the planet is now generating proposed schemes to create business for themselves that pumps up U.S. corporate profits and campaign contributions. Why do you think Mattis is suddenly out, and ads are suddenly running that ‘Blackwater is Coming’?

My advice? Ask now-former DOD Secretary Mattis—who opposed mercenary armies—how he feels about using his credibility to arrange significant increases in DOD appropriations and then getting the boot as soon as the mechanism to finance secret private armies goes into place.”

Catherine should have added General Kelly as well. With large appropriations achieved, he was replaced as White House Chief of Staff by the head of OMB, who himself had led the Administration approvals for FASAB 56.

So, not only are the U.S. sovereign bonds no longer sovereign, but the U.S. military that has heretofore served as the backbone of the U.S. financial strength is no longer a sovereign military—it is increasingly being privatized or replaced by private armies, free to roam in U.S. territory as well.

This state of affairs is not unrelated to the fact that an increasing number of the senior officials and legislators in the U.S. government are reported to have dual citizenship. Unfortunately, an accurate account of the number of dual citizenships is also secret.20 Where do these officials’ and legislators’ loyalties lie?

Where does that leave us? If we have a “moral obligation” bond in a governmental financial mechanism operating under the cloak of secrecy in a jurisdiction with multiple secret intelligence agencies, and private armies are operating on behalf of private investment syndicates, who is really in charge, where are they going, and what does it mean to investors?

Honestly, we don’t know. If there is no law, and there is no coherent understanding of how resource management works and who is in control and how that control operates, then we are approaching a system where fiat currency has little or no meaning. We suppose that if you are a member of the secret societies that now run everything, and you trust your secret decoder ring, then you have a way of understanding this.

Essentially, to continue to finance such an operation, we have to trust the “moral obligation”; we have to trust a secret group of people, and we have to trust that assets are not being transferred out the door—although $21 trillion in undocumentable adjustments clearly would suggest otherwise. And, given the rate of entropy in the economics and the many indications that it is accelerating, we have to depend on the military mechanism and, increasingly, private armies to keep the harvesting machinery fed.

Even from the point of view of one who is a member of the committee that runs the secret government, how is anything this big and this secret supposed to work?

Given where we are, U.S. Treasury bonds are not just “moral obligation” bonds. Rather, they may represent a new mechanism for financing disaster capitalism—how about “Benghazi bonds”?

Our challenge is, as we look around the world, that there is a planet full of warlords, oligarchs, and bullies who clearly offer no practical alternative for our capital. This is a powerful argument for challenging the United States to rebuild a sovereign government, rather than accelerating the growth of corporate and bank control. Some investors believe that diversifying their capital into the banks and corporations that have been successful at engineering these rolling coups and “piratization” is the way to go. Given the underlying economics and lawlessness, we are not as confident in that as a strategy. Whatever happens, creditors will be better protected if we reduce operational and political dependency on privileged secrecy and a bloated National Security State.


The U.S. is reversing two decades of globalization by “reshoring” significant operations and capital. The decision to do this is logical, given the unraveling of the Bretton Woods system and new developments in manufacturing technology and material science. As part of this process, the U.S. Congress and Administration have now taken a series of steps in federal accounting policies that render a significant portion of the U.S. government and U.S. fixed-income, derivatives, and equities markets “dark.”

With FASAB 56, the U.S. has created significant new capacity to continue to operate outside the law with impunity. This enhances its ability to field and fund private armies domestically and internationally, engage in securities fraud, launder the assets and profits of war out of and through the United States government and transfer them to private corporations and investors, and complete the corporate and banking control of U.S. government operations.

Ask yourself how you feel about private corporations owning and controlling nuclear weapons. President Eisenhower was furious when Stephen Bechtel, Sr. first suggested that Bechtel should be permitted to own nuclear weapons. Eisenhower would have none of it.

During the George W. Bush Administration, Bechtel assumed control of the U.S. nuclear laboratories, calling this takeover a “privatization.” Another description would be “coup d’état”—turning over the nation’s nuclear energy and weapons complex to a private company financially vested in starting a new Cold War. Do you want the private investors who profited so richly from the Iraq War—and who have a vested interest in starting a new Cold War with the Soviet Union—to be in charge of the nation’s nuclear arsenal?

Sally Denton, in her book The Profiteers: Bechtel and the Men Who Built the World, quotes a senior employee at Lawrence Livermore National Laboratory who referred to this new style of private management of our nuclear energy and weapons infrastructure as a combination of “the worst aspects of the Department of Motor Vehicles and Goldman Sachs.”

Given the level of uncertainty and secrecy, only you, the investor, can decide if this is something that you wish to finance. If you do wish to finance it, you must determine the nature of what your financial asset is and your investment risk and how to price it.

For many years, most investors have purchased U.S. Treasury bills and bonds or related securities secure in the knowledge that this was one credit they did not have to worry or think about. That time has come to an end. A sure thing has been replaced by something that is no longer sure. And, the investor cannot be sure exactly what that thing is or who controls it—just that it’s secret.

As a U.S. or global citizen and as a fiduciary responsible for family or institutional assets, you must also determine your responsibility and risk if the enterprise you are financing continues to aggressively reorganize its global and domestic operations at your expense and the expense of those you love.

Caveat emptor is the ancient rule. It certainly applies.

There is another ancient rule that applies as well: “Do unto others as you would have them do unto you.”

It’s your money. You are responsible for where it goes and what it does in your name.


“FASAB Statement 56: Understanding New Government Financial Accounting Loopholes,” The Solari Report, December 29, 2018.

FASAB Statement 56, “Classified Activities,” from FASAB Handbook.

FASAB Issues Exposure Draft: “Interpretation of Federal Financial Accounting Standards 56: Classified Activities, July 12, 2018.

“The Missing Money: $21 trillion dollars is missing from the U.S. government. That is $65,000 per person—as much as the national debt!” The Solari Report, 2018 Annual Wrap-Up.

“Enforce the Constitution.” The Solari Report.

2018 Annual Wrap Up: The Real Game of Missing Money, Catherine Austin Fitts, The Solari Report.

“Summary Report on ‘Unsupported Journal Voucher Adjustments’ in the Financial Statements of the Office of the Inspector General for the Department of Defense and the Department of Housing and Urban Development,” Catherine Austin Fitts and Dr. Mark Skidmore, The Solari Report, September 23, 2017.

“The History and Organization of the Federal Reserve: The What and Why of the United States’ Most Powerful Banking Organization,” Michele Ferri and Jonathan Lurie, The Solari Report,

“The Appropriations Clause: A History of the Constitution’s (As of Yet) Underused Clause,” Michele Ferri and Jonathan Lurie, The Solari Report,

“The U.S. Statutes Creating Modern Constitutional Financial Management and Reporting Requirements and the Government’s Failure to Follow Them,” Michele Ferri and Jonathan Lurie, The Solari Report

Matt Taibbi, “Has the Government Legalized Secret Defense Spending?” Rolling Stone, January 16, 2019.

Steven Aftergood of the Federation of American Scientists’ Project on Government Secrecy, “Financial Accounts May Be ‘Modified’ to Shield Classified Programs,” Secrecy News, August 15, 2018.

SAS No. 122, “Clarified Statements on Auditing Standards,” clarifies previously issued statements; links to the redrafted standards and related interpretations are included in a table at this link:

AU-C Section 240 (SAS No. 128), “Consideration of Fraud in a Financial Statement Audit.”

AU-C Section 250, “Consideration of Laws and Regulations in an Audit of Financial Statements.”

AU-C Section 805 Special Considerations—Audits of Single Financial Statements and Specific Elements, Accounts, or Items of a Financial Statement, American Institute of Certified Public Accountants SAS No. 122, effective for audits of single financial statements or specific elements, accounts, or items of a financial statement as of or for periods ending on or after December 15, 2012.

AU-C Section 806 (SAS No. 125) “Reporting on Compliance With Aspects of Contractual Agreements or Regulatory Requirements in Connection With Audited Financial Statements.”

Bryan Bender, “Iraq Audit Can’t Find Billions” Boston Globe, October 16, 2004.

“HUD Oversight and Management Issues: Testimony before the U.S. House of Representatives Committee on Appropriations Subcommittee on Transportation, Housing and Urban Development, and Related Agencies,” March 16, 2017.

GAO Testimony before the Subcommittee on Government Management, Information and Technology, Committee on Government Reform, House of Representatives: “USDA Faces Major Financial Management Challenges,” March 21, 2000.

GAO Audit Report to Department of Interior Secretary Bruce Babbitt, September 29, 1995.

GAO (Charles Bowsher) Testimony before the Senate Government Affairs Committee, “Aggressive Actions Needed for Air Force to Meet Objectives of the CFO Act,” February 19, 1992.

GAO Report: “Ongoing Challenges with Reconciling Navy and Marine Corps Fund Balance with Treasury” (December 20, 2011)

GAO Report to Congressional Testers: “Lack of Disciplined Processes Puts Implementation of HHS’ Financial System at Risk” (September 23, 2004)

GAO Report to the Committee on Commerce, Science, and Transportation, United States Senate, and the Committee on Science, House of Representatives “NASA’s Integrated Financial Management Program Does Not Fully Address Agency’s External Reporting Issues” (November 2003)

GAO Report to the Honorable Charles E. Grassley, U.S. Senate, “Differences in Army
and Air Force Disbursing and Accounting Records” (March 2000)

GAO Testimony Before the Subcommittee on Interior and Related Agencies, Committee on Appropriations, House of Representatives: “Indian Trust Fund Accounts Cannot Be Fully Reconciled,” (March 8, 1995)

Testimony [Statement of Comptroller General David Walker] Before the Subcommittee on Government Efficiency, Financial Management, and Intergovernmental Relations, Committee on Government Reform, House of Representatives; U.S. GOVERNMENT
FINANCIAL STATEMENTS FY 2001 Results Highlight the Continuing Need to Accelerate Federal Financial Management Reform (April 9, 2002)

Comment letters on FASAB Exposure Draft of Statement 56,

Conclusions of the Financial Crisis Inquiry Commission Report, (January 2011),

Kai Ryssdal, “Negroponte given power to waive SEC rules,” Marketplace (May 24, 2006),

Executive Order 12333, United States Intelligence Activities (December 4, 1981)

Executive Order 12356, “National Security Information,”

Executive Order 13526, “Classified National Security Information,”


Appendix A: Explanation of the Interpretation Process under FASAB 56

Appendix B: FASAB 56 Comment Letters

Explanation of the Interpretation Process under FASAB 56

Under the FASAB MOU, there was a six-step procedure for the issuance of future (presumably classified) Interpretations pursuant to which Standard 56 permits modifications that may have the effect of altering the government’s net results of operations and net position. This process is disclosed in the Appendix of Statement 56 as follows:

a. Identification of accounting issues and agenda decisions

i. The Board will carry out this step by consulting with cleared stakeholders in secure facilities. Stakeholders—including preparers, auditors, and users of classified information—will be informed regarding the process for raising issues for Board consideration.

b. Preliminary deliberations

i. Preliminary deliberations will engage all members of the Board. Deliberations will occur during closed meetings. Closed meetings will be approved and announced in the Federal Register consistent with the process established in the Federal Advisory Committee Act.

c. Preparation of initial documents (issues papers and/or discussion memoranda)

i. We expect that all initial documents will contain classified information and will therefore be subject to federal requirements pertaining to classified information. Initial documents will be prepared by cleared individuals of FASAB staff and representatives of affected organizations who have original or derived classification authority. Such documents will be shared with members in a setting appropriate to the classification level of the documents. Members will be afforded adequate time to review the materials, ask questions, and deliberate over the materials before making decisions regarding the issues raised.

d. Release of documents to the public, public hearings, and consideration of comments

i. Members of the public will have an opportunity to comment on the proposed Statement. The public will be able to comment on the general subject matter discussed in the proposed Statement and the existence of classified Interpretations. The Board will consider all comments provided.

ii. Also, because we expect that all documents related to Interpretations will contain classified information, release will be limited to cleared individuals and organizations that have signed a non-disclosure agreement and have a need-to-know, in accordance with federal requirements pertaining to classified information. The Board will ensure a representative group of stakeholders with varied perspectives and appropriate clearances are engaged. The Board expects to seek input from elected representatives of the public and appointed government officials to ensure the needs of citizens are balanced against national security interests. The Board will consider all comments and input received from the representative group of stakeholders.

e. Further deliberations, exposure draft, and consideration of comments

i. This step will occur in closed sessions as noted above. The Board will seek input from cleared individuals, including elected and appointed officials, and organizations to the greatest extent possible given the classified nature of the materials and deliberations. The Board will consider all comments and input received from the representative group of stakeholders.

f. Vote to approve proposed Interpretations

i. Consistent with the Board’s established procedures for consideration of proposed Interpretations, final classified Interpretations will be those approved by a majority of the members and not objected to by a member representing the Comptroller General, the Secretary of the Treasury, or the Director of OMB during a 45-day review period. Final classified Interpretations will be maintained by FASAB. Component reporting entities should contact FASAB to arrange access to the classified Interpretations as needed. FASAB will provide access to any relevant Interpretations following appropriate security procedures.

FASAB 56 Comment Letters

Comments on Standard 56 Exposure Draft

On December 14, 2017, FASAB issued the Exposure Draft for Classified Activities for comment. Comments were due March 16, 2018. On July 5, 2018, the “Sponsor Review” draft of proposed Standard 56 was released On July 12, 2018, FASAB issued the Exposure Draft Interpretation of Federal Financial Accounting Standards 56: Classified Activities. On July 17, 2018 the FASAB issued a Notice of Request for Comment on the Exposure Draft of a Classified Interpretation of Federal Financial Accounting Standards (SFFAS) 56: Classified Activities. The Standard was issued in final form in the Federal Register on October 15, 2018.

Seventeen comment letters were received on the FASAB 56 Exposure Draft, two from independent public accounting firms (Kearny & Company and KPMG), three from associations of CPAs (the AICPA, the Association of Government Accountants/FMSB and the Greater Washington Society of CPAs) and twelve from various federal government reporting entities.21 The accounting firm comments are most instructive in providing us guidance as to what ought to have been incorporated in the Statement, as opposed to what was actually adopted, and what risks are involved in the application of Standard 56 by the government’s independent public accounting firm auditors (if, in fact, such auditors are able to perform successful government audits within the restrictions imposed under Standard 56).

Kearney & Company

Kearney & Company’s Jamie Cox, an administrative assistant at the firm (instead of its CEO or government services executive) submitted Kearney’s comments to FASAB on Statement 56, presumably with the authority to speak for the firm.22

In answer to the question “Do you agree or disagree with the Board’s overall proposed approach for protecting, classified information? Please provide the rationale for your answer.” Kearney responded:

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. This approach retains the benefits of GPFFR and audited financial statements in terms of improving underlying processes, systems, and controls, as well as the usefulness of GPFFR to users, even if those users are limited.

The FASAB’s proposed approach could result in material omissions in [General Purpose Federal Financial Reports]. By FASAB’s own definition, “The determination of whether an item is material depends on the degree to which omitting or misstating information about the item makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or the misstatement.” If GPFFR can be 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. [Emphasis added]

In other words, users cannot rely upon financial statements modified in accordance with the Exposure Draft, which was adopted without significant change as the final Statement 56.

Kearney’s comments go on to point out that allowing modifications based upon classified interpretations would “limit due process and transparency,” elements that are crucial to the process of developing GAAP. Kearney “disagrees” with allowing modifications of disclosures and required supplementary information (i.e., financial statement footnotes, which are key to an understanding of audited financial statements). Assuming that Statement 56 is adopted (an eventuality Kearney clearly opposes in anything like the Exposure Draft form), Kearney proposes that two sets of books be produced: modified and unmodified, with “[f]ormalized crosswalks of the unmodified financial statements to modified/condensed financial statements” as well as further parameters for classification of line item or disclosure. In response to the proposal that no disclosure be made to users as to the existence of financial statement modifications, Kearney politely but firmly states that it disagrees, because “GAAP serves the purpose of providing complete, consistent and reliable information to users of financial statements. Permitting these omissions would seem to go against these purposes.

Kearney proposes two alternative methods of protecting classified information from disclosure in audited federal financial statements: either (1) the preferred approach, where all required activity is included in the face of the financial statements and, at the line-item level, classified activity is concealed within line item balances or (2) the less preferred method, where classified information is excluded from the financial statements, a disclosure is made that the exclusion has occurred and the audit report relates only to the scaled down financial statements that exclude classified information.

Kearney proposes that financial statements of classified entities should remain classified or redacted like other classified documents before release to the public. Under its preferred approach, Kearney would require reporting entities to reporting entities to first attempt to comply with existing standards and not use the classified activities standard. In coordination with the independent public accountants, the reporting entity should attempt to broadly describe financial information in a manner that classified data is protected. If the disclosure modification cannot be avoided, Kearney believes the disclosure modification should be disclosed to make users aware that relying on the information within the footnotes should be done so understanding that certain disclosures have been modified for the protection of classified information. The problem with this “fix,” however, may be that the whole point of Statement 56 is to enable the government reporting entities not to disclose sufficient information to users (i.e., the public) to enable it to understand the extent to which the financial statements have been modified and the inherent risks in allowing only those with top secret clearances to understand the real expenditures and asset transfer line items underlying the modifications.

Kearney’s second (less preferred) approach would be to rely upon AU-C Section 805, “Special Considerations—Audits of Single Financial Statements and Specific Elements, Accounts, or Items of a Financial Statement” to remove the classified information from the publicly accessible federal financial statements. It appears, although Kearney’s comments do not go into detail on this point, that, using AU-C Section 805, the independent public accountants would produce two separate sets of audited financial statements, one “scaled down” version released to the public and another one that is classified and is available only to those with proper security clearances and a “need to know.” The classified portion would be for the “single financial statements and specific elements, accounts or items” covered by AU-C Section 805.

The unaddressed problems with this approach are at least twofold: (1) even under AU-C Section 805, the independent public accountants issuing the audit opinions are required to conduct the audit of both sets of statement in a manner that satisfies the professional standards under SAS 122, the goals of which are to render financial statements fully transparent to the user, and it would appear impossible for the modifications permitted under Standard 56, particularly those made in accordance with classified “interpretations,” which may have the effect of modifying the net results of operations, to “pass the smell test,” so to speak, under SAS 122 and (2) in order for independent public accountants to form an audit opinion on the classified portion of the government’s financial statements, the accountants would have to review the “real” books and, presumably, have proper security clearances. Nothing in the professional standards outlined in SAS 122 addresses classified information and the prospect that the issuer of the audit opinion is under regulatory constraints, with specter criminal liability, for disclosing information. Can independent public accountants, even with security clearances, be counted upon to safeguard the secrecy of the classified audited statements if they suspect that fraud or illegitimate motives may be involved?23 If the independent auditors cannot render a clean audit opinion on the classified financial statements, under AU-C Section 805 they may be forced to disclose in the public portion of the financial statements the fact that they could not render a clean opinion on the classified statements. Under AU-C Section 805, it appears that a separate independent public accounting firm could issue the audit opinion on the classified statements, thereby reducing the number of accountants involved in viewing the classified supporting records and modifications, but even those accountants would be required to be independent public accountants (as opposed to employees of the U.S. government). If the classified statements (presuming classified information could be segregated into separate financial statements, which may not be the case) could not be audited, it may take an amendment to the [CFO Act] by Congress to exempt the classified portions of government financial statements from audit requirements. Presumably, if members of the deep state believed that Congressional approval could be obtained for such an exemption, there would have been no need for Statement 56.


KPMG’s comments on the exposure draft begin with the self-serving statement that “We support the Board’s efforts to address the challenges posed by the financial statement presentation of classified activities” and then immediately points out the obvious elephant in the room of FASAB 56, “[w]e believe there are certain aspects of the [Exposure Draft] that are unclear, which will make implementation difficult.” The authors suggest that the paucity of detail in the Exposure Draft (and final) FASAB 56 make it not only difficult, but impossible, for independent public accountants to implement FASAB 56 while conforming to GAAP and GAAS.

Among the key issues addressed in the KPMG comment letter are:

(1) Inconsistency of Standard 56 with underlying concepts applicable to the presentation of federal financial statements under 16b of SFFAC 8, which provides:

“Operating Performance. Federal financial reporting should assist report users in evaluating the service efforts, costs, and accomplishments of the reporting entity; the manner in which these efforts and accomplishments have been financed; and the management of the entity’s assets and liabilities.”

(2) Complexity – “The brevity of the standard implies a simplicity in its application. As we considered several possible scenarios under this proposal, we realized that each masking decision leads to other decisions that take the preparer further away from the stated objectives in SFFAC 8.” For this reason, KPMG suggests an example be given to users.

(3) Disclosure – KPMG states that it believes that there should be disclosure that modifications of presentations and omissions of disclosure have been made because, in the absence of such an alert to users, their ability to assess how much weight to place on reported results in evaluating an entity’s operating performance will be impaired.

(4) Future Interpretations – Since Statement 56 apparently allows for the issuance of “interpretations” that would, arguably, override existing statements instead of merely clarifying existing statements (as the FASAB Handbook indicates interpretations are intended to do), KPMG suggests, instead, the issuance of new standards to deal with what the Statement 56 Exposure Draft envisions being contained in “interpretations.” The problem with this fix, as noted by KPMG, is that it does not deal with the fact that Statement 56, Appendix A, provides for classified interpretations. The comment letter rightly questions how management of a reporting entity can contend that its financial statements have been prepared under GAAP when management [not to mention the independent accountants], do not have access to all of GAAP.

KPMP’s other comments include a concern that the inclusion of the statement that “unclassified reports should be presented in a manner that protects the classified information” as a GAAP requirement leads to the conclusion that the audit opinion provides assurance that the entity has protected its classified information, and that would not be the case. KPMG also recommends including a statement that a modification does not change the character of rhe underlying asset. For example, “if Asset X is presented as Asset Y in the financial statements, Asset X retains the accounting for the type of asset it is.” Aside from other technical, largely insubstantial, comments, KPMG’s only remaining issue is whether OMB is required before the exclusion of a classified reporting entity.

Securities and Exchange Commission

Given that the main goal of SEC regulations is transparency in disclosure to investors and the general public, it is worth noting that the SEC’s only comment on the Exposure Draft of Standard 56 is in response to the question whether every component reporting entity of the federal
government should be required to disclose that certain presentations may have been modified. SEC’s comment was:

We believe that this would be misleading and likely to cause confusion for financial statement readers, by implying that SEC is involved in classified activities. It’s likely that SEC, as well as other agencies, would receive numerous inquiries from the public and from the media by including such an unexpected disclaimer in its financial statements.

In other words, the agency whose mandate it is to protect investors from undue risk from the absence of disclosure, or existence of misleading or incomplete disclosure, about the financial and other risks of investing in U.S. securities is mainly interested in preventing nuisance questions from investors as to why SEC-sanctioned financial statements of government reporting entities have an overbroad statement that indicates, incorrectly, that all government financial statements may have been modified when, in fact, the particular statements that are the subject of investor focus may not have been modified. In other words, the SEC does not believe that a given reporting agency’s financial statements should include the boilerplate “modification legend” set forth in the Exposure Draft if that reporting agency’s statements were not modified because that would lead to many inquiries of the SEC that would not otherwise be necessary. The SEC indicated no concern that massive modifications to government financial statements for alleged national security purposes (without any support as to the legitimacy of such national security interests) may result in the issuance of meaningless disclosure, or that U.S. investors will be unable to assess the risk of investing in securities whose values may be affected by the economic stability of the U.S. government.

The SEC’s apparent lack of concern (or concession that it is powerless to change what the deep state has decreed must happen) about potentially-misleading financial disclosure must be put in context. The SEC is the U.S. government agency that sets the standards for what disclosure is required for public companies and companies issuing registered and exempt securities in offerings to investors. It is the SEC that issues guidance and regulations on the accounting methods to be used in financial statements that are filed with it by publicly traded companies pursuant to the federal securities laws and it is the SEC that oversees the Public Company Accounting Oversight Board24 created under Sarbanes-Oxley in 2002 to oversee audits of public companies. Anyone who has been through an internal or external audit of a registered securities broker-dealer or investment adviser or an SEC/PCAOB audit or the audit of a public company by an independent public accounting firm knows that moving one line item in a financial statement to another line item, filing financial statements without explanatory footnotes, making unaccountable voucher adjustments and keeping key support information from auditors is strictly verboten and would be cause for shutting down the company immediately. Yet the SEC is in support of these very practices by the U.S. government, without any requirement that the validity of the need for obfuscation for “national security” purposes be verified by any independent auditor or the SEC itself.

Association of Government Accountants on behalf of the Financial Management Standards Board

Not surprisingly, the AGA/FMSB [agrees] with the conclusion and FASAB’s overall rationale as presented in the Basis for Conclusions in the Exposure Draft, believes that the overall approach is reasonable, since “[o]ne element of national security is the ability to restrict the viewing of sensitive information,” and agrees that reporting entities should be permitted to modify their presentation when it does not change net results and net position. However, AGA/FMSB believes even those modifications should not change the meaning of the information or be misleading. It takes issue with the lack of disclosure to explain modifications resulting in amounts associated with one financial statement line item being presented in another financial statement line item.

AGA/FMSB agrees with the proposed process for the adoption of classified interpretations as stated in the Exposure Draft whereby there is a development of classified proposals, comment on the proposals from individuals and organizations holding appropriate clearances, consideration of comments, and issuance of Interpretations to individuals and organizations holding appropriate clearances. As regards the omission of required disclosures, this commenter recommended that the FASAB should clarify that omitted disclosures should not negatively affect other financial information. This latter comment is not entirely clear, it appears that AGA/FMSB would propose omission of only disclosures for which omission would not negatively affect (i.e., mislead as to) other financial information.


AICPA’s comments on the Exposure Draft were made from the perspective of the AICPA’s role in the designation of FASAB as the body to establish generally accepted accounting principles (GAAP) for federal government entities and not to comment specifically on the proposed accounting and related questions posed in the Exposure Draft. One focus was the limited due process accompanying the adoption of Interpretations when necessary to provide detailed guidance not included in the Statement 56 itself. AICPA believes that the six-step process described in the Exposure Draft, which includes cleared preparers, auditors, and users of classified information is adequate under the circumstances and consistent with the Board’s normal due process procedures as outlined in FASAB’s MOU. AICPA emphasizes, however, the importance of including a representative group of stakeholders with varied perspectives and appropriate clearances be engaged in the due process of Interpretations and the fact that the determination who has a “need to know” will be critical to the process. AICPA believes as broad an interpretation as possible the realm of federal requirements for classified information is advisable.

The AICPA comment letter concludes with this cautionary statement:

Finally, we recommend that FASAB closely monitor the implementation of this standard and the development of any future classified Interpretations from a Rule 203 perspective through the Board’s annual self-review process. Following the standard protocol established between the FASAB and AICPA, we would expect that any issues or concerns that arise relating to any of the Rule 203 criteria (e.g., reportable events) would be reported to the AICPA on a timely basis.

Greater Washington Society of CPAs

The Greater Washington Society of CPAs Federal Issues and Standards Committee (FISC) states that its 3,300 members include thirty who are active in financial management, accounting, and auditing in the Federal sector. While generally supporting FASAB’s approach to protecting classified information, FISC recommended the following:

a. [T]he FISC suggests that the Board consider the impact of classified information on total budgetary resources. If the Board’s intent is to purposefully include or exclude total budgetary resources for this Standard, then the FISC suggests that the Board address this matter in the final Standard.
b. The FISC suggests that the Board include in the final Standard whether a modification could be so material that the overall financial statement presentation no longer represents a fair presentation of the financial position and operations of the entity.
c. The FISC suggests that the Board consider additional guidance or action on ensuring the consistent classification and presentation of transaction cycles or end items among component reporting entities. Such discussions could occur through a Board-appointed or Board-sponsored working group, which would include a representative group of stakeholders, to evaluate the consistent application of this Standard among reporting entities.

Other Federal Agency Comments

Other federal agencies that submitted comments on the Exposure Draft largely approved of and agreed to the proposed terms of Statement 56 with one notable exception – some (Treasury, HUD, DoD, Energy, and Interior but not Homeland Security) expressly approved only modifications that would not affect net results of operations and net position. However, it is not clear that all commenters “got” the loophole that unclassified financials statements could include modifications that affect net results of operations and net position if supported by a classified Interpretation.

HUD’s only substantive comment was:

HUD does not believe that every component reporting entity of the federal government should be required to disclose that certain presentations may have been modified. Revealing the mere presence of such information, in a particular reporting component, may compromise the classified information or the underlying reporting component entity that generated the classified information.

This comment is particularly interesting in light of HUD’s history of reporting large unsupported journal voucher adjustments against Treasury and the fact that HUD’s mission would appear to not involve any need for withholding of classified information from its financial statements.

The DOD strongly supports the issuance of classified Interpretations and generally approves of Statement 56 as proposed but disagrees that every component within the federal government should disclose that its financial statements may contain modifications in order to protect classified information. DOD’s primary concern appears to be that FASAB’s due process requirements adequately protect sensitive information and that the mechanisms for that include strict enforcement of validation of any stakeholder’s need to know and obtaining a signed non-disclosure agreement.

The Department of Veterans Affairs is in agreement with the whole approach of Standard 56 except that it strongly disagrees that component reporting entities should not have to disclose certain presentations may have been modified, unless there are actual modifications. Its reasoning is that such a policy would lead to questions from external parties if an agency with no expected classified activities adds a disclosure that presentations have been modified. Adding the disclosure to only entities with classified activities should not present a security concern to the United States or its citizens.

Treasury strongly believes that, in order to protect classified information, every component reporting entity in the U.S. Government should disclose that its financial statements may have been modified.

Homeland Security’s comments included two unsolicited proposals not covered by other comment letters. First, it noted that one of its component reporting entities favored having classified activities audited by properly-cleared members of its Office of Inspector General. Second, Homeland Security suggests that the Board may wish to consider adding an accounting category that covers secret spending and secret projects (without revealing the details of how much applies to any specific project.

The comments from the Office of Personnel Management stressed the importance of applying GAAP standards but were in favor of disclosure that modifications may have been made to financial statements to protect classified information only in the first year of implementation of Standard 56.

The Department of Labor favors at least annual review by the Board of Standard 56 so that “FASAB may act proactively as opposed to reactively in response to changes that may occur in the Federal security environment.”

Finally, an “Other Governmental Agency” comments stated in answer to most questions posed that protecting classification information should take precedence over [the issuance of audited] financial statements. An additional comment is that

“. . . there definitely needs to be a limited audience/participative base to protect the discussion of need to know information. . . The current lack of guidance leaves accounting practices open for interpretation, creating an environment where financial reporting preparers, reviewers and independent auditors may arrive at different conclusions that impact the financial statements”

The “current lack of guidance” comment may be an indication of past problems on the government accounting front. From its designation and comments, we might speculate that these comments came from the CIA, NSA or similar intelligence agency or component.


1 Securities Exchange Act Rule 10b-5 (codified at 17 C.F.R. 240) is the major antifraud provision in U.S. securities law. It enables an investor to recover damages from the counterparty in the purchase or sale of a security if the investor suffered a loss as the result of the counterparty’s untrue statement of a material fact or omission to state a material fact in connection with the purchase or sale

2 See for Solari’s list of the top 100 government contractors.

3 The Credit Rating Agency Reform Act of 2006 (Pub.L. 109–291, 120 Stat. 1327) was enacted on September 29, 2006. This law required the SEC to establish clear guidelines for determining which credit rating agencies qualify as NRSROs. It also gives the SEC the power to regulate NRSRO internal processes regarding record-keeping and how they guard against conflicts of interest and makes the NRSRO determination subject to a Commission vote (rather than an SEC staff determination). Notably, however, the law specifically prohibits the SEC from regulating an NRSRO’s rating methodologies. In June 2007, the SEC promulgated new regulations that implemented the provisions of the Credit Rating Agency Reform Act. In February 2009, the SEC promulgated amended regulations designed to address concerns about the integrity of the process by which NRSROs rate structured finance products, particularly mortgage-related securities. [Source: Wikipedia]

4 Source: Wikipedia, “Credit Rating Agency” fn. 3, citing Christopher Alessi, “The Credit Rating Controversy. Campaign 2012,” Council on Foreign Relations,

5 Other credit rating agencies include DBRS (owned by Carlyle and Warburg Pincus), Kroll Bond Rating Agency, A.M. Best (for insurance companies), Egan-Jones, and Morningstar (for mutual funds).

6 Page 118. Get the report here: The Commission was established as part of the Fraud Enforcement and Recovery Act passed by Congress and signed by the President in May 2009. This independent, 10-member panel was composed of private citizens with experience in areas such as housing, economics, finance, market regulation, banking, and consumer protection. Six members of the Commission were appointed by the Democratic leadership of Congress and four members by the Republican leadership. The Report was issued in January 2011 and is often referred to as the “Angelides Report” after its chairman, Phil Angelides.

7 An unsupported (or “undocumentable”) journal voucher adjustment against Treasury by DOD or HUD is a debit or credit on the books of the federal reporting entity that has to be made in order to reconcile the agency’s version of its assets, liabilities, income, and expenditures with what the U.S. Treasury’s books reflect. In order to pass an audit, however, an explanation has to be made by the agency’s independent public accountants as to what caused the discrepancies. When DOD says that it has made $20T in undocumentable journal voucher adjustments against Treasury, without more information, we do not know whether the net of the adjustments is positive or negative: if all of the adjustments are debits, then the agency has “lost” $20T, whereas if the credit balance and the debit balance of adjustments is equal, the net balance is zero and the agency is just unable to explain its mistakes, but there is no gain or loss. In the unlikely event that all of the adjustments are credits, then the agency has just “found” $20T it did not know it had.

Complicating this analysis is the fact that when one adjustment is made, it may require an adjustment in sub-accounts. Assuming the adjustments of the sub-accounts are included in the total of “unsupported journal adjustments,” the total of all adjustments may tend to overstate the problem through duplications. On the other hand, multiple debit and credit adjustments over a single reporting period (a government fiscal year, from October 1 until September 30 of the following year, in the case of an audit), may net out to zero, making it appear that no adjustment has been made but enabling the agency to mask secret or unauthorized expenditures (debits) with accounting entries that zero out the results of operations over the year (i.e., credits). In any case, even one trillion dollars is a big number—once explained as approximately one dollar for each second going back to Jesus Christ.

8 See: “Exclusive: The Pentagon’s Massive Accounting Fraud Exposed,” The Nation (January 7, 2019).

9 Credit for this observation goes to Matt Taibbi. See “Has the Government Legalized Secret Defense Spending?” Rolling Stone, January 16, 2019.

10 In a February 13, 2019 conversation with a member of the staff of the FASAB, we were told that independent auditors would have access to classified supporting information, but we cannot verify this from publicly available materials, and we do not know whether there are limits on access to classified documents.

11 Senate: Arkansas, California, Colorado, Florida, Idaho, Kentucky, Maine, Virginia, Kentucky, Missouri, Arkansas, Texas, Nebraska, New Mexico, New York, North Carolina, Oklahoma, Oregon, New Mexico, Maine, Florida, New York, Rhode Island, Texas, and Virginia Colorado. House: Ddistricts in the additional states of Alabama, Connecticut, Illinois, Indiana, Ohio, Utah, Vermont, and Illinois, Washington, Vermont, Ohio and Utah.

12 Note that in Barack Obama’s executive order on classified information (Executive Order 13526), the list of classified items includes only nine categories, eliminating the “catch-all” tenth category. We do not know whether, as has been suggested elsewhere, Obama’s restatement of existing directives from the original Reagan executive order (Executive Order 12356) has the effect of rescinding or replacing matters that are dealt with in both executive orders. If so, the Obama executive order may have the effect, in this regard, of narrowing the amount of information that may be legally subject to classified treatment. In other ways, however, the Obama executive order is expansive, specifically, in providing for a process for government contractors to request that information over which they have control is classified.

13 In 1981, President Ronald Reagan delegated authority over the SEC classified information exemption from the requirements that public companies keep accurate books and records to the Director of National Intelligence.

14 A public company is a company with securities (equity and debt) owned and traded by the general public through the public capital markets, generally through a securities exchange like the New York Stock Exchange, or over the counter on the NASDAQ. Shares of a public company are openly traded and widely distributed. Under the Exchange Act, any company with more than $10 million in assets and 500 shareholders of record is required to register with the SEC under the Exchange Act and is subject to reporting standards and regulations under Sections 13 and 15(d) under the Exchange Act. Registration under the Exchange Act is separate and distinct from registration of securities in an initial public offering under the Securities Act of 1933 (“Securities Act”), although Exchange Act registration often follows a company’s initial public offering.

15 The title and a synopsis of each section in the professional standards covered by SAS 122 can be found at

16 C.f., Portia Crowe, “We have new details on Goldman Sachs’ $5 billion legal settlement,” Business Insider, April 11, 2016, and “Senate subcommittee investigating Financial Crisis releases documents on role of investment banks,” New York Times, April 14, 2010,

17 For those interested in learning how commonplace these techniques have become, covert harassment and violence for political ends are covered regularly on The Solari Report. We also recommend Richard Dolan’s documentary series “False Flags,” the litigation section in the Resources section at, and a general search on “banker deaths” and “natural doctor deaths.”

18 A review of spying and leaks by the U.S. intelligence agencies and enforcement services during the 2016 Presidential Election and the incoming administration offer an excellent example of this sovereignty “collapse.” For a reader interested in knowing more, see the excellent coverage at The Last Refuge ( and video interviews available at YouTube on this subject with William (Bill) Binney, retired technical director of NSA.

19 It is noteworthy that the lead contractor on DOD IT and payment systems from fiscal 1998 to fiscal 2015 (and lead on HUD IT and payment systems for a portion of the time as well) spun their government contracting division out to Leidos (to which SAIC had spun a portion out to the previous year) after the close of fiscal 2015, but before the announcement that $6.5 trillion was missing at DOD. See “Lockheed Cuts and Runs” at The Solari Report:

20 See “Dual Citizens in Congress? We Need to Know” by L. Michael Hager, from Foreign Policy Journal, December 10, 2018.

21 These included the Department of Veterans Affairs–OFP, Department of Energy–OCPO, the Department of Housing and Urban Development, the Department of Labor–OCPO, the Department of Interior, the Office of Personnel Management, the Department of Defense OIG, the Department of Homeland Security–OCPO, the Department of Treasury–OCPO, and an “Other Governmental Agency.”

22 The firm’s website makes the following statement about its government auditing practice:

Kearney experience includes financial audits at the department and agency levels, major components, and Government corporations. Kearney’s approach for providing financial audit services is consistent with the GAO/CIGIE FAM, which defines a methodology for conducting financial statement audits of Federal entities. Kearney reaches beyond FAM guidance to tailor our audit approach to the unique needs of each client. Our financial audits are designed to add value and insight, to improve financial management, operations, and accountability.

23 AU-C 240.05 states that:

An auditor conducting an audit in accordance with GAAS is responsible for obtaining reasonable assurance that the financial statements as a whole are free from material misstatement, whether caused by fraud or error. Due to the inherent limitations of an audit, an unavoidable risk exists that some material misstatements of the financial statements may not be detected, even though the audit is properly planned and performed in accordance with GAAS.

24 Among other things, the SEC approves the PCAOB’s rules, standards, and budget.