"I am incredibly nervous that we will implode in a wave of accounting scandals," wrote Watkins, who noted: "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 in trouble."
In response to Watkins' concerns, Lay asked Enron's law firm, Vinson & Elkins, to investigate the matter. But Enron also asked its lawyers to refrain from "second-guessing the accounting advice and treatment" given by Arthur Andersen.
What Did Management Know?
Watkins' letter is just the latest indication that the highest levels of Enron management knew about the working of the investment vehicles, whose financial assets were not publicly disclosed until October.
On Oct. 16, Enron announced a $638 million quarterly loss, and said the company's value was a staggering $1.2 billion less than it had previously reported. After additional bottom-line revisions in November and an aborted takeover deal by rival Dynegy Inc., Enron declared bankruptcy.
"This is huge," said House Energy and Commerce Committee spokesman Ken Johnson on Monday. "This clearly shows that top Enron officials and Ken Lay himself were warned of serious financial problems months before the company reported its third-quarter loss. The committee is concerned that some people tried to hide the truth."
Among the other ramifications of Enron's collapse, thousands of company employees lost a large portion of their savings because the company's 401(k) plan relied so heavily on Enron stock.
In addition to the inquiry from Tauzin's committee and at least three others in Congress, the Department of Justice and the SEC are also investigating Enron and Arthur Andersen's role in the affair.
White House Scrutiny
Additionally, the White House has been the subject of intense scrutiny in the last week after disclosing a variety of contacts between Lay and other Enron executives and members of the Bush administration.
The White House disclosed today that Lay called Mitch Daniels, director of the Office of Management and Budget, in October to discuss the possible passage of an economic stimulus package. At the time, the administration favored a stimulus package repealing the corporate alternative minimum tax.
Two Cabinet members — Treasury Secretary Paul O'Neill and Commerce Secretary Don Evans — have acknowledged they had been contacted by Lay about the company's troubles in October. And earlier this month, Vice President Dick Cheney detailed a series of meetings that took place in 2001 between himself and his energy task force staff, and Lay or other Enron officials.
There is no indication that administration officials are a target of the ongoing federal investigations.
ABCNEWS' Ariane DeVogue, David L. Herndon and Ramona Schindelheim contributed to this report.