- 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.
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- 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 appointed
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
accounting 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 comment.
-
- 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 shareholder 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.
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- 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
Hilder.
-
- 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 Metallgesellschaft.
-
- 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 question 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 doing 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.
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- ___
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- By Wendy Zellner, with Stephanie Forest Anderson, in
Dallas and with Laura Cohn in Washington
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- http://www.businessweek.com
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