I was reading an article this morning on new secret stealth drones the US Air Force are supposedly working on, and some of the contractors (Northrop, Boeing, et al) who would be working on them.
A mention was made in the article of a contract won by Northrop (for the B2 back in 2008) worth ~$2Billion dollars, which they kept ‘off the books’.
I’m curious then, as to how a publicly listed company, who has rules and regulations surrounding disclosure imposed on it by the SEC, juggles those responsibilities with the demands of the military to carry out secret work. I wouldn’t expect to open up Northrop’s annual report and see a line item:
Revenue - DOD - B2 Stealth project $2B (back when the B2 was still super secret anyway)
Seems to me that the awarding of a significant contract from the Department of Defense for a new line of aircraft would be the sort of major event that the SEC would expect Northrop to announce to the market, but if the model of plane is still super secret no way would the military want that announcement made.
Do the Sec Def’s people get on the phone to the SEC, and tell them that no announcement will be made about a contract that doesn’t exist, that will definitely not generate $2B in revenue for Northrop?
No, because the existence of such a contract gives away that there is a secret project they are working on. The notion of a “black” program is that it actually does not exist. For the purposes of secrecy it is hidden as expenditures in any one of a million things, none of which are related to each other, that will only show up as cost overruns given very careful auditing. Therefore, the money is “off the books” and would presumably be in violation of SEC rules.
It’s a good question. I’m curious to know the answer myself, if it can be answered.
If a project costs 2 billion dollars forinstance that is the total programme costs. This includes costs of salary and benefits for the workers, research costs, infrastructure costs, procurement costs for equipment etc. You do not have to hide all that. It will be on the balance sheet. The programme might be “black”, all it’s expense do not have to be. You can easily list who is working for you, your procurement of machinery, infrastructure you have without giving more than a mostly general reason of what they or it does.
Defense contractors work on lots of contracts at any given time, and neither SEC filings or any other financial statement requires stating which contracts they are working on or how much money they were paid for each one. Furthermore, the SEC is often accused of treading lightly with defense contractors, preferring to leave them to the Defense Department, which has broad oversight powers over their own contracts, and stronger criminal penalties.
People who watch the defense industry claim that many “white” projects only exist to give financial and operational cover to “black” projects. This has more to do with the budget than the contractors, as the budget contains line-item information that contractors do not have to provide to anyone.
Independent auditors under Sarbanes-Oxley, of course, need to verify the integrity of financial reports in far greater detail, and I don’t know how that works, but I do know that the big accounting companies recruit auditors with security clearances.
Not necessarily-- It just gives away that there is some project or another they’re working on. Companies like Boeing or Lockheed are always working on a bunch of government projects-- Everyone knows that. Sure, if they say “500 million for F29 engines, 3 billion for aileron actuators, and 2 billion for something else”, then it’s going to be obvious that the “something else” is a black project, but there’s no reason they need to be specific about any of the other items, either.
If one contract would be a substantial part of a business’s operations, I think the entry into that contract is a reportable event for an 8-K. Presumably for a company the size of LMI or Boeing, no single contract would rise to that level, but for a smaller company I suppose it could be an issue. On the other hand, a company small enough that one contract is that significant may still be privately held.
This. Keep in mind that the Secretary of Defense and the SEC Chairman both have the same boss and, in a nutshell, are tasked with carrying out his policies.
I work in the defense industry for a large public company that does black contracts. As far as I know, what drachillix says is fairly close to the correct answer. Remember that all defense companies (both public and private) receive regular visits from the Defense Contract Audit Agency (DCAA) and the Defense Contract Management Agency (DCMA) that have the proper clearances and insights to review all contracts within a company. They check everything from material purchases to the hours employees are billing to contracts and their deliverables to make sure everything is kosher, there is no overbilling, etc. While I don’t know specifically, I have no doubt that with a public company like mine, the DCAA and DCMA probably work with the SEC and independent auditors to confirm that certain amounts listed for classified contracts are indeed correct without providing details.
As someone who writes proposals, one challenge I have along these same lines is when I am listing examples of past performance. This is always a major factor in how the Government evaluates a contractor for new work, based on how they performed on similar work in the past. When I use a classified contract as an example of past performance, I have to speak in very general terms, and can’t even use the whole contract number because the first six digits correspond to the issuing office. If that office or Agency is itself classified, even the number has to be written like: XXXXXX-09-D-1234. And when the write up is complete, both the program manager and the security office have to review it to make sure nothing too specific is listed that gives away too much of what is going on, should the data ever get requested in a Freedom of Information Act (FOIA) inquiry.
The OP may be interested in the story of International Signal and Control. A venerable UK defence firm named Ferranti bought it because on paper it was extremely profitable. After buying it it turned out that all the profits were in fact coming from secretive CIA (and other clandestine US agency) work, which immediately ceased upon the take over. The resulting palava brought down Ferranti as well.
I’d add that this isn’t so much an SEC issue. DCAA (Defense Contract Audit Agency) does daily floor checks on just about every company I’ve ever worked for.
