Sherron Watkins—Revelations of a Letter

Who Is Sherron Watkins?Sherron Watkins gained fame as the so-called “whistle-blower” in the Enron accounting scandal.

“Enron hid billions of dollars in debts and operating losses inside private partnerships and dizzyingly complex accousnting schemes that were intended to pump up the buzz about the company and support its inflated stock price.” Watkins wrote two letters, one anonymously, to Enron’s chairman, Kenneth Lay. In those letters she “exposed top officials—perhaps including Lay himself—who for months had been trying to hide a mountain of debt, and started a chain reaction of events that brought down the company.”

Watkins had a “flair for numbers” and the training and expertise to recognize a “funny accounting scheme.” She received an accounting degree from the University of Texas at Austin in 1981 and a master’s degree in accounting in 1982, after which she went to work for Arthur Andersen’s Houston office. Watkins transferred to Andersen’s New York City office and then subsequently returned to Houston in the early 1990s to work for Enron. Eight years after joining Enron, Watkins had risen to the position of vice president for corporate development.

According to one retrospective account of the Enron scandal, Watkins “understood that something very bad was going on, something everyone else seemed to think was perfectly okay, and that public revelation would be disastrous.” Somehow Watkins “was able to escape the groupthink that ensnared her colleagues.”

Nonetheless, she worried about the future—apparently both Enron’s and her own. As she wrote in a six-page letter to Ken Lay, “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 résumé, the business world will consider the past successes as nothing but an elaborate accounting hoax. Skilling is resigning now for ‘personal reasons’ but I would think that 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.”

The Events Leading up to Watkins’ Instant FameDuring the summer of 2001, Sherron Watkins worked for then-chief financial officer Andrew Fastow, looking for assets to sell as Enron ran into financial trouble. She repeatedly uncovered “off-the-books arrangements that no one could explain or seemed to want to investigate.” She was uncomfortable approaching Fastow or then-CEO Jeffrey Skilling, not trusting either one. Fastow himself played a major role in the off-the-books partnerships she kept encountering. Watkins also knew that other executives who questioned such transactions had encountered Skilling’s wrath, and she feared being fired if she approached Skilling directly. Consequently, Watkins debated for weeks regarding the course of action to take.

Her direction became clear when Jeff Skilling abruptly quit his job on August 14, 2001, and Kenneth Lay, Enron’s chairman, called a company-wide meeting to take place on August 16, asking for employee comments and concerns beforehand. Watkins wrote an anonymous one-page letter expressing her concerns about the off-the-books arrangements and deposited it in the designated dropbox. Lay did not address Watkins’ concerns during the company-wide meeting.

Subsequently, Watkins sought advice from a friend and former colleague at Arthur Andersen; that friend concurred with her concerns. Drawing on this advice, Watkins prepared a six-page letter describing her worries and presented the letter to Ken Lay in an August 22 meeting with him. Prior to delivering the letter to Lay, Watkins asked her mother, Shirley Klein Harrington, to review it. In a subsequent interview, Harrington commented, “There was no option about whether or not she was going to send it. She knew she had to say something. But all along she never imagined that she was going to be the only one.”

Watkins’ six-page letter was very revealing and filled with much angst. She observed that “Skilling’s abrupt departure will raise suspicions of accounting improprieties and valuation issues. . . . 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 went on to ask, “Is there any way our accounting gurus can unwind these deals now? . . . 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.” Watkins added, “I realize that we have had a lot of smart people looking at this and a lot of accountants including AA & Co. have blessed the accounting treatment. None of that will protect Enron if these transactions are ever disclosed in the bright light of day.”

Watkins believed that the probability of discovery of the “funny accounting” significantly increased after Skilling’s departure. Consequently, she suggested in her letter to Ken Lay that he had two alternative courses of action: (a) “The probability of discovery is low enough and the estimated damage too great; therefore we find a way to quietly and quickly reverse, unwind, write down these positions/transactions;” or (b) “The probability of discovery is too great, the estimated damages to the company too great; therefore we must quantify, develop damage containment plans and disclose.” In short, the first solution linked a low probability of discovery with what some people might consider to be a cover-up of the problems of significant magnitude. The second suggestion advocated a more open and forthright approach to dealing with significant problems that surely would be discovered by the public. In her letter, Watkins said, “I firmly believe that the probability of discovery significantly increased with Skilling’s shocking departure. Too many people are looking for a smoking gun.”

Lay promised Watkins he would have a team of lawyers review the controversial deals discussed in Watkins’ letter. Lay decided to use Enron’s legal counsel, Vinson & Elkins, despite Watkins’ concern regarding the conflict of interest involved in doing so. Vinson & Elkins provided advice on some of the questionable deals that Watkins discussed in her letter.

According to Watkins, “Enron’s unspoken message was, ‘Make the numbers, make the numbers, make the numbers—if you steal, if you cheat, just don’t get caught. If you do, beg for a second chance, and you’ll get one.”

How Did Watkins Gain Instant Fame?Watkins’ letter to Lay was discovered in a box of Enron documents that had been seized pursuant to a Congressional investigation of the Enron collapse and associated accounting scandal. Investigators released—some observers say leaked—the letter, in its entirety, on January 15, 2002. Immediately, Watkins was dubbed a “hero whistle-blower.” One account described Watkins as “the tough-talking Texas woman who had stood up to all of the good old boys in the corporate hierarchy, the men who had been making millions while their employees and shareholders watched some, or all, of their life savings evaporate.” Another commentator observed that Watkins had enough courage “to send the boss a pull-no-punches, put-it-on-record letter telling him . . . that his company was more or less a Ponzi scheme, and it sounds like she knew she wasn’t telling him anything he didn’t already know.” In commenting on reactions to the letter’s release, still another columnist wrote, “what was once envisioned as a new kind of company resembled little more than a circular firing squad of executives, accountants, consultants, and lawyers, all fighting to stay in business or, at least, out of jail.”

Although some of the news media characterized Watkins as the “Enron whistle-blower,” others in the media pointed out that Watkins never really blew a whistle. One commentator observed, “A whistle-blower would have written that letter to the Houston Chronicle, and long before August; Watkins wrote it to Ken Lay, and warned him of potential whistle-blowers lurking among them.” Another commentator wrote, “A whistle-blower, literally speaking, is someone who spots a criminal robbing a bank and blows a whistle, alerting police. That’s not Sherron Watkins. What the Enron vice president did was write a memo to the bank robber, suggesting he stop robbing the bank and offering ways to avoid getting caught. Then she met with the robber, who said he didn’t believe he was robbing the bank, but said he’d investigate to find out for sure. . . . [A] whistle-blower is someone who alerts the public. She never did.”

On Valentine’s Day of 2002, appearing before a Congressional subcommittee, Watkins testified that Jeffrey Skilling, Andrew Fastow, and other Enron executives, as well as Arthur Andersen and Vinson & Elkins, duped Ken Lay and the board of directors. Some observers questioned Watkins’ apparent continuing loyalty to Kenneth Lay. Some observers were surprised—perhaps even stunned—that Watkins expressed support for Ken Lay and Enron’s board. Apparently, Watkins’ sister, Julie Reagan, was not surprised. Reagan says, “She’s a very loyal person—loyal to her friends and her family and even her job. So I think if she didn’t care about Enron, she would have left without ever having bothered to correct what was going on. But what she wanted to do was make it right.”

Dan Ackman, a writer for Forbes magazine, commented, “Many people were in a position to expose Enron’s accounting. Each did nothing. Watkins did something. But not much.” Watkins agrees. “My warnings were too little, too late,” she says. “The question is, why weren’t objections raised and addressed much earlier? . . . Most people do know right from wrong.”

Watkins’ Professional Life: Today and TomorrowSherron Watkins resigned from Enron late in 2002. Time magazine named her “person of the year” in 2002. She co-wrote a book, Power Failure (Doubleday, 2003), about her experiences at Enron. She lectures on business ethics and the erosion of trust in corporations, receiving as much as $35,000 per appearance. Watkins also meets frequently with high-level executives to discuss her experiences and perspectives. Watkins admits to being a fan of ethics training programs and employee hotlines run by external, independent parties. But she does not believe that ethics training and employee hotlines are substitutes for a culture that rewards rather than punishes honesty.

In the future, Watkins plans to open a not-for-profit consulting firm that will help corporations do annual “board checkups,” with an emphasis on spotting ethical and other problems before its too late. Reflecting back on the ordeal at Enron, Watkins concludes, “the company did not put its money where its mouth was when it came to vision and values.” Some would say that Watkins is guilty of the same anomaly. “It is ironic,” according to one critic, “that Watkins hopes to make a name for herself in the boardroom, when she didn’t choose to inform Enron’s board of the company’s problems but instead went to Lay.”

Questions for Discussion

1.What risks did Sherron Watkins take by writing the six-page letter to Kenneth Lay? Do you believe she should have written the letter? Why or why not?

2.Suppose that Sherron Watkins decided to do nothing with the knowledge she had regarding Enron’s “funny accounting.” What would have been the possible risks (or consequences) to her for failing to act?

3.Was Sherron Watkins a whistle-blower or not? Explain your position.

4.What responsibility does an employee have for reporting questionable or unethical activity that he/she uncovers while doing his/her job? Does this responsibility differ, depending on whether the individual is a lower, middle, or upper-level employee?

Sources

This case was developed from material contained in the following sources:

Ackman, D. (February 14, 2002). Sherron Watkins had whistle, but blew it. Forbes, accessed February 4, 2005.

Colvin, G. (July 25, 2002). Wonder women of whistleblowing. Fortune, accessed February 4, 2005.

Duffy, M. (January 19, 2002). By the sign of the crooked E. Time.com, accessed February 4, 2005.

Frey, J. (January 25, 2002). The woman who saw red: Enron whistle-blower Sherron Watkins warned of the trouble to come. Washington Post, accessed February 4, 2005.

The letter to Ken Lay. (January 16, 2002). Fortune, accessed February 4, 2005.

Mehta, S. (October 14, 2003). Employees are the best line of defense. Fortune, accessed February 4, 2005.

Pelligrini, F. (January 18, 2002). Person of the week: “Enron whistleblower” Sherron Watkins. Time.com, accessed February 4, 2005.

Reingold, J. (September 2003). The women of Enron: The best revenge. Fast Company, accessed February 4, 2005.