It’s lunchtime and Sherron Watkins is showing no signs of flagging.
She’s been giving interviews since 5:45 this morning – everywhere from the cosy chat of the BBC Breakfast sofa, to the tougher environs of the Today studio. That she is coping so well is all the more impressive considering she is still jetlagged, having only just flown in from the US. It took a programme on hydrocarbons to send her to sleep at 3am with a pillow over her head as her husband watched an NFL game on the hotel TV.
But Watkins is used to sleepless nights. Ever since Congress seized on the memos she wrote to her then CEO, Kenneth Lay, in August 2001 warning of problems at Enron, she has barely been out of the media spotlight. Television crews camped out on her lawn on day one.
An accountant and Enron vice-president, she became concerned about accounting practices at the Houston-based energy giant. In those now-famous memos she told Lay of her fears that Enron’s days might be numbered because of a complex accounting fraud designed to keep debt off the balance sheet. She was, it turned out, absolutely right.
After a career at Andersen, Watkins joined Enron in late 1993, initially working for Andy Fastow, the easy-going whizz kid who went on to become Enron’s chief financial officer.It is Fastow, head bowed and handcuffed in photos that have appeared around the world over the last year, who has come to symbolise what went wrong with corporate America.
Working for him, Watkins managed Enron’s £1bn-plus portfolio of energy-related investments held in Enron’s various investment vehicles.
And it was around this time that she began to have concerns about Enron’s accounting. She recalls passing two former Andersen colleagues in the corridor at Enron and wondering whether the auditors should be questioning Enron’s aggressive fair-value accounting policy. She asked when they were going to ‘grow some balls and stop us’.
Instead of being questioned further (‘they should have taken me to lunch and asked why it bothered me,’ she says) she was reported to Fastow who told her to keep her nose out.
Back then she didn’t appreciate the full seriousness of the company’s accounting aggression, but did decide to act. ‘It concerned me enough that I switched jobs at Enron because I didn’t want to be that close to the questionable accounts,’ she says now.
But despite this, she didn’t think about leaving. ‘To leave Enron at that time in Houston, people would have thought you were being let go. They wouldn’t have thought you were leaving voluntarily.’
Instead she transferred to Enron’s international group where she spent three years ‘blissfully unaware of problems’. Watkins then transferred into Enron’s broadband unit where she worked on various projects until late June 2001, when she went back to work for Fastow in Enron’s mergers and acquisitions group. ‘That’s when I stumbled across a clear fraud,’ she says.
In the ensuing weeks she resolved to act. She intended to find another job and, on her last day, confront Jeff Skilling with her evidence. But Skilling beat her to it. He left on 14 August 2001. It was this that spurred Watkins into action. On August 15 she sent an anonymous letter to Lay. ‘The very next day I identified myself and set up a meeting for the following week with him,’ she says. At that meeting Lay asked for time to investigate. ‘That’s pretty much the last I saw of him,’ Watkins says.
Events were about to get significantly worse. About a dozen people knew about the memos before then and Watkins was thrown ‘there’s-the-evil-one’ stares whenever she passed them in the corridor. Fastow, meanwhile, tried to get her fired.
But by now there were other priorities. ‘October 16 was when Enron announced their rather questionable write-offs,’ Watkins says. ‘The stock was trading at $33 a share and within six weeks it was at 9 cents a share and the company was declaring bankruptcy on December 2. On December 3 – I call it black Monday – nearly five thousand employees were summoned to these floor meetings and told: “I hate to tell you this but last Friday was your last pay check”.’
Watkins survived the cull as she was required to brief in-house lawyers about her memos. At this stage she hired a lawyer of her own. ‘On January 14, Congress found my memos and released them to the press and all hell broke lose,’ she says. ‘And it became very hard for Enron to let me go.’
By now Watkins was working in a non-job in what was soon to become, to all intents and purposes, a non-company. She had to battle to find work to do so that she didn’t give her critics ammunition. She feared being accused of simply taking the money and sitting things out. She also had to battle against internal demons. ‘It’s easy to become a conspiracy nut,’ she acknowledges.
Watkins is full of mixed feelings. She says she has always had a love/hate relationship with the company and, while she may feel Fastow has been scapegoated (he has been indicted, while Lay and Skilling have not), she believes that he does bear responsibility too.
‘I knew his moral compass had no true north,’ she says. ‘If someone told him to do something he’d think that was OK. His defence right now is company executives knew what he was doing. His defence is almost like a mob assassin. “I was told to kill someone, I was only following orders”.’
And despite dedicating her book to the memory of Arthur Andersen, she is angry that the US firm lost its moral compass too. ‘I joined Andersen in 1982 and it really was the holy grail of good accounting and good auditing,’ she says. ‘That’s the Andersen I knew and if you talk to any old-time Andersen people they all have some local office story of how they all stood by their accounting principles and turned away a client or dropped a client. I was proud to work there.
‘Then 16 years later it came out in their trial that in February 2001 Andersen had a meeting about the company and it considered Enron its riskiest worldwide client and considered whether to drop Enron. They decided that it was a $52m a year client and it might one day be a $110m a year client so decided to just do a really good job and put more people on it but keep it as an audit client. So 16 years later it is deciding money is more important than good accounting – to their ultimate demise.’
And while not forgiving, she understands how her Enron colleagues found themselves caught up in the mess. At the time she changed jobs in 1996, she compares herself to a frog in boiling water. ‘The water got slightly lukewarm and I hopped out. And thank goodness. Some of the people who are now in criminal trouble were friends of mine.’
She imagines they struggled to tell when their accounting went from creative to aggressive and, ultimately, to fraudulent. ‘You’re not really taking steps towards the edge of a cliff and being forced to step off,’ she says.
‘It’s more like you’re walking down an eggshell. Each step doesn’t look too much different from the one you have just taken. But all of a sudden you’ve slipped off.’
An accountant by accident, Watkins is also a somewhat reluctant whistleblower.
She never went outside the organisation with her concerns, something for which she has been praised and vilified in equal measure.
‘When a company cooks the books it’s best bet to come clean from inside. If it is exposed from the outside it means almost certain financial ruin. I was hoping Enron would do the right thing. If they had continued the fraud I would almost certainly have considered doing something outside.’
Watkins resigned from Enron in November 2002. She has testified before Congressional Committees from the House and Senate investigating Enron’s demise. And she has had plenty of support for her actions. On the streets of Houston, people shout ‘go, girl’ at her. Last year she was named by Time magazine, along with two others, as their 2002 Persons of the Year, for being ‘people who did right just by doing their jobs rightly’. ‘That was just crazy,’ says Watkins of the accolade.
Watkins is starting a consulting firm to advise boards, but for now enjoys and endures a constant round of lectures, book signings (she has co-written Power Failure, the Inside Story of the Collapse of Enron) and interviews.
She is pragmatic enough to recognise she should strike while the iron is hot, but is clearly looking forward to the attention shifting elsewhere.
‘The interest in the story still hasn’t really died down because there’s no resolution yet,’ she says. ‘It’s so funny. USA Today has done a review of our book and the book by Fortune magazine, The Smartest Guys In The Room.
‘I know what the reviewer is getting at but in both reviews he says “I’m just a little bit disappointed by the end of the story because I would have expected more executives to be in prison.” I wanted to tell him, this isn’t fiction. You can’t just make up the ending. But there is just this feeling of unfinished business.’
THE MEMO THAT STARTED IT ALL
By August 2001 Sherron Watkins had grown increasingly concerned about accounting fraud at Enron where she is a vice-president in finance. She decides to write a memo to outline her concerns. Over the next several days she writes a number of memos outlining those concerns, proposing solutions and predicting consequences. Below is an edited extract of the first, to chairman Kenneth Lay.
Has Enron become a risky place to work? For those of us who did not get rich over the last few years, can we afford to stay? (CEO Jeff) Skilling’s abrupt departure will raise suspicions of accounting improprieties and valuation issues. Enron has been very aggressive in its accounting – most notably the Raptor transactions and the Condor vehicle. The spotlight will be on us, the market can’t accept Skilling is leaving his dream job.
I am incredibly nervous that we will implode in a wave of accounting scandals. My eight years of Enron work history will be worth nothing on my resume, the business world will consider the past successes as nothing as an elaborate accounting hoax.
Skilling is resigning now for personal reasons but I think he wasn’t having fun, looked down the road and knew this stuff was unfixable and would rather abandon ship now than resign in shame in two years. Is there a way that our accounting gurus can unwind these deals now? I have thought and thought about how to do this, but I keep bumping into one big problem.
We booked the Condor and Raptor deals in 1999 and 2000, we enjoyed a wonderfully high stock price, many executives sold stock, we then try and reverse or fix the deals in 2001 and it is a bit like robbing the bank one year and trying to pay it back two years later.
Nice try, but investors were hurt, they bought at $70 and $80/share looking for $120/share and now they are at $38 or worse. We are under too much scrutiny and there are probably one or two disgruntled ‘redeployed’ employees who know enough about the ‘funny’ accounting to get us into trouble.
What do we do? I know this question cannot be addressed in the all-employee meeting, but can you give some assurances that you and Causey will sit down and take a good hard objective look at what is going to happen to Condor and Raptor in 2002 and 2003?
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