Enron whistleblower Sherron Watkins yesterday fingered two top corporate officers as “swindlers” who devised elaborate accounting schemes to “dupe” stockholders, the board of directors and even former Chairman Kenneth L. Lay.
In testimony before the House Energy and Commerce Committee, Ms. Watkins, an Enron vice president, said the “culprits” perpetrating the schemes were former Chief Executive Jeffrey Skilling and former Chief Financial Officer Andrew Fastow.
Also culpable, she said, were the energy giant’s auditor, Arthur Andersen; its lawyer, Vinson & Elkins; Chief Accounting Officer Richard Causey and former Treasurer Ben Glisan.
As she spoke, Enron announced that it was firing Mr. Causey and Richard Buy, a chief risk officer who she said was also involved.
Ms. Watkins said the officers carried out a scheme to hide more than $1 billion in debt in the company’s “Raptor” partnerships and create the illusion of income and earnings by issuing Enron stock to the partnerships that showed up as offsetting income on the company’s balance sheets.
“It was sheer income manipulation,” said Ms. Watkins, a certified public accountant who worked for Andersen for eight years before joining Enron. “It is never appropriate to use stock as an income transfer.”
But when Ms. Watkins explained the problem to Mr. Lay in August and pleaded with him to take drastic action to “come clean” with stockholders in October, “I don’t think he understood the gravity of the situation,” she said.
Mr. Skilling, on the other hand, was “well-versed” in the transactions and approved several of them in writing, she said. “Mr. Skilling is very intense and was very involved,” she said, and knew that the risky Raptor deals could not have been legitimate because no outside firm would be willing to do them.
Mr. Skilling in testimony before the committee last week repeatedly denied having any detailed knowledge of the transactions and said the company was in good financial shape when he left in August.
Mr. Skilling’s attorney, Bruce Hiler, yesterday said Ms. Watkins’ statements were “based either on hearsay, rumor or opinion,” not on fact.
Mr. Fastow, who was ousted in October as the accounting scandal unraveled and Enron catapulted toward its December bankruptcy, was the architect of the schemes, she said. He and Mr. Skilling “intimidated” employees in the company’s global finance office to keep them from revealing anything.
Ms. Watkins, who worked for Mr. Fastow last year before being transferred, said she is slightly afraid for her personal safety because of her damning testimony. She said she was afraid to raise her concerns to either Mr. Fastow or Mr. Skilling last year because she thought she would be fired.
Mr. Fastow did try to fire Ms. Watkins after she alerted Mr. Lay to the problems in her now-famous Aug. 15 memo warning that the company “could implode in an accounting scandal.” She said Mr. Lay was considering elevating Mr. Fastow to chief executive at the time, which is why she warned him.
Mr. Fastow also at that time sought to seize her computer, and Ms. Watkins said she relinquished it to him after copying all her files. She said she kept her notes and other sensitive records in a safe-deposit box.
Committee members praised her for her courage in coming forward and said Congress would move swiftly to defend her if anyone threatens harm.
“You are an extraordinarily courageous woman who has been a bright spot in an otherwise sorry and outrageous saga,” said Rep. John D. Dingell, Michigan Democrat.
Ms. Watkins said she did not alert the Securities and Exchange Commission of the accounting problems because she believed the company could act to resolve them.
She said she urged Mr. Lay at the end of October to disclose the deals to stockholders and fire the perpetrators, including the law and accounting firms. That way, she said, he would avoid getting “more blame than he deserved.”
But although Mr. Lay pledged to “get to the bottom” of the matter, she said, his actions fell short of the drastic steps needed to restore the company’s credibility in the financial markets.
Rather than sever Enron’s relationship with Vinson & Elkins, Mr. Lay asked the law firm to look into the accusations. In its report, the law firm said the Raptor deals posed some “cosmetic” problems but that they were “clever, useful vehicles that benefited Enron.”
Ms. Watkins said the Enron management viewed the deals as “complex, clever and legitimate” because they allowed the company to meet its financial targets, keeping Enron’s stock price high.
Enron managers were constantly worried about meeting their earnings predictions to avoid disappointing Wall Street and deflating the stock price, she said.
“If we ever missed our earnings target, Wall Street would look at us under a microscope, and that would lead to disaster,” she said.
While many of the company employees knew something was wrong with the transactions, she said, many believed that the company had somehow managed to cleverly circumvent accounting rules.
“It was common knowledge that the Raptor losses were backed by Enron stock,” she said. “People seemed to think there was some accounting rule that made that possible.”
“Enron was doing very well. Its stock was doing very well. There was an atmosphere where you didn’t want to rock the boat,” she said.
Even top officers who were uneasy about Mr. Fastow’s off-balance sheet deals were not always fully aware of the problem, she said.
Former Enron Vice Chairman Cliff Baxter, who last month committed suicide, frequently complained to Mr. Skilling that the deals benefited Mr. Fastow more than the company. Mr. Fastow made $30 million from the partnerships.
But Ms. Watkins said Mr. Baxter told her only days before he took his life that he didn’t realize that they were illegal and that he would have “pushed” harder against them if he had known.
Mr. Baxter told Mr. Skilling in March, “We are headed for a train wreck, and it is your job to stop it,” according to Ms. Watkins.