Enron Worker Warned Lay of 'Accounting Scandals'

Jan. 15, 2002 -- A high-level official at Enron warned CEO Kennneth Lay about an impending disaster at the now-bankrupt firm months before the company went under, according to a letter made public on Monday.

The memo, sent to Lay in August by Sherron Watkins, Enron's vice president of corporate development, expresses concern that the energy trading company "will implode in a wave of accounting scandals," and raises further questions about Lay's knowledge of his company's inner workings.

Read the Letter from Sherron Watkins to Kenneth Lay

Watkins took a confrontational tone in her note, beginning with a pointed question: "Has Enron become a risky place to work? For those of us who didn't get rich over the last few years, can we afford to stay?"

‘Veil of Secrecy’

Watkins went on to complain about a "veil of secrecy" surrounding the so-called special-purpose entities in which Enron masked hundreds of millions of dollars of debt and investment losses.

Watkins added that company officials "consistently and constantly" complained about the firm's financial practices.

"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 October, the energy giant announced a third-quarter loss of $638 million, and added that its value was a staggering $1.2 billion less than it had previously reported. After additional bottom-line revisions in November, the company filed the biggest bankruptcy petition in U.S. history on Dec. 2.

"I thought he should know the facts and look into them," Watkins told ABCNEWS this afternoon, when asked why she sent the letter to Lay. She said the CEO's reaction was one of "concern, surprise, and he assured me he would look into it."

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?

Excerpts from the memo were first released Monday by Rep. Billy Tauzin, R-La., chairman of the House Energy and Commerce Committee, one of a handful of congressional committees planning to hold hearings soon on the spectacular collapse of Enron. The committee then released the full letter today.

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 included in Enron's public financial filings. It has been previously reported that Lay and Skilling had been involved in setting up some of the special-purpose investment vehicles in 1999.

"This is huge," said House Energy and Commerce Committee spokesman Ken Johnson. "This clearly shows that top Enron officals 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."

In December, Joe Berardino, CEO of Arthur Andersen, testified before Congress that Enron had skirted accounting rules in order to avoid reporting financial information concerning one of the investment entities.

In addition to the inquiry from Tauzin's committee and at least three others in Congress, the Department of Justice and Securities and Exchange Commission are also investigating Enron.

Arthur Andersen is also the subject of subpoenas from Tauzin's committee and of the federal investigations. The company announced last week it had destroyed thousands of documents pertaining to Enron.

Thousands of Enron employees have lost a huge chunk of their savings because the company's 401(k) plan relied so heavily on Enron stock.

Additionally, the Bush administration has been the subject of heavy scrutiny in the last week, after two Cabinet members — Treasury Secretary Paul O'Neill and Commerce Secretary Don Evans — acknowledged they had been contacted by Lay about the company's troubles in October.

ABCNEWS' Ariane DeVogue contributed to this report.