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JANUARY 18, 2002
NEWS ANALYSIS
An Enron Hero -- with a Smoking-Gun Letter
Sherron Watkins' memo to CEO Ken Lay spoke volumes about the
company's behavior. So did the higher-ups' tepid response
At last, someone in the sordid Enron scandal seems to have done the
right thing. Thanks to whistle- blower Sherron S. Watkins, a no-
nonsense Enron vice-president, the scope and audacity of the
accounting mess is becoming all too clear. Her blunt Aug. 15 letter
to Enron CEO Kenneth L. Lay warns that the company might "implode in
a wave of accounting scandals." And now that her worst fears have
been realized, it is also clear that Watkins' letter went far beyond
highlighting a few accounting problems in a handful of off-balance-
sheet partnerships. Watkins' letter lays bare for all to see the
underbelly of Enron's get-rich-quick culture.
Watkins, 42, a former Arthur Andersen accountant who remains Enron's
vice-president for corporate development, put her finger on the rot:
top execs who, at best, appeared to close their eyes to questionable
accounting maneuvers, a leadership that had lost sight of ordinary
investors and the basic principles of accounting, and watchdogs --
the outside auditors and lawyers whose own involvement may have left
them too conflicted to query the nature of the deals. Perhaps the
question shouldn't be how Enron collapsed so quickly -- but why it
didn't implode sooner.
A REVEALING REPLY. Lay's response to Watkins' complaints is nearly as damning as her
letter itself. Yes, he talked to her for an hour. And, yes, he ordered an outside
investigation. But contrary to Watkins' advice, he app
ointed the company's longtime Houston law firm, Vinson & Elkins, despite the obvious
conflict: V&E had worked on some of the partnerships. And Enron and V&E agreed there
would be no "second-guessing" of Andersen's account
ing and no "detailed analysis" of each and every transaction, according to V&E's Oct.
15 report. The inquiry was to consider only if there was new factual information that
warranted a broader investigation. V&E declined c
omment.
Surprise: V&E concluded that a widespread investigation wasn't warranted. It simply
warned that there was a "serious risk of adverse publicity and litigation." And
Watkins' letter reveals the inadequacy of Lay's response
in the months following CEO Jeffrey K. Skilling's sudden Aug. 14 resignation for
"personal reasons." His departure triggered the letter.
Lay never fully disclosed the partnerships or explained their impact to investors,
even as he vowed there were no accounting issues and "no other shoe to fall." Even
after Enron revealed on Oct. 16 a $1.2 billion hit to s
hareholder equity related to the partnerships, Lay continued to express ignorance
about details of these deals and support for Chief Financial Officer Andrew S. Fastow,
who managed and had stakes in certain partnerships.
On Oct. 24, Fastow was removed from his job and promptly left the company.
TENACIOUS AND COMPETENT. Watkins, an eight-year Enron veteran, is not some disgruntled
naysayer who is easy to dismiss. Her lawyer, Philip H. Hilder, says she became
familiar with some of the partnership dealings when she
worked in June and July in Fastow's finance group. Her position allowed her to review
the valuation of certain assets being sold into the partnerships, and that's when she
saw "computations that just didn't jibe," says H
ilder.
Former executives say the Tomball (Tex.) native was tenacious and competent. "She
wasn't really an alarmist," says one former Enron employee. Her mother, Shirley Klein
Harrington, a former high school accounting teacher,
calls her daughter "a very independent, outspoken, good Christian girl, who's going to
stand up for principle whenever she can." Watkins had previously worked at Andersen in
Houston and New York and then for Germany's Met
allgesellschaft.
At those companies, she befriended Jeffrey McMahon, whom she helped recruit. Now the
CFO at Enron, McMahon "complained mightily" about the Fastow partnerships to Skilling,
Watkins told Lay in the letter. "Employees questi
on our accounting propriety consistently and constantly," she claimed. McMahon didn't
return calls. Skilling has denied getting any warnings about accounting.
RED FLAGS. Watkins didn't stop there. Five days after she wrote to Lay, Watkins took
her concerns directly to an Andersen audit partner, according to congressional
investigators. He in turn relayed her questions to senior
Andersen management on the Enron account. It's not known what, if any, action they
took.
Of course, Skilling and Andersen execs shouldn't have needed a letter and a phone call
from Watkins to figure out something was seriously amiss. Red flags abounded. And
Watkins, for one, had no trouble putting her finger
on questionable accounting practices. She wondered if Enron was hiding losses in
off-balance-sheet entities while booking large profits from the deals.
At the same time, the outside partnerships were backed with Enron stock -- a tactic
sure to backfire when it was falling -- and no outsiders seemed to have any capital at
risk. Was Enron creating income essentially by doi
ng deals with itself? "It sure looks to the layman on the street that we are hiding
losses in a related company and will compensate that company with Enron stock in the
future," she wrote.
In the end, Watkins grasped one thing that Enron's too-clever-by-half dealmakers
didn't: Enron's maneuvering didn't pass the smell test. Even if Enron and its
high-priced auditors and lawyers can ultimately show that they
followed the letter of the law, it matters little. As Watkins herself wrote, if Enron
collapses, "the business world will consider the past successes as nothing but an
elaborate accounting hoax." And that seems destined
to become Enron's epitaph.
By Wendy Zellner, with Stephanie Forest Anderson, in Dallas and with
Laura Cohn in Washington
Copyright 2000-2001, by The McGraw-Hill Companies Inc. All rights
reserved.
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