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Whistle-blower's letter shows Enron staff fears

Enron Corp employees were so nervous about the energy trader's murky finances last summer that they wished they "would get caught" for using shaky accounting methods, a company vice president wrote to Enron chairman Kenneth Lay in a letter released in its entirety on Tuesday.

Whistle-blower Sherron Watkins, an Enron Global Finance vice president, wrote in August -- months before Enron's stunning collapse -- that she had heard one senior Enron manager say, "I know it would be devastating to all of us, but I wish we would get caught."

Questioning Enron's accounting for deals involving one of scores of outside partnerships used by the company to prop up its debt-laden balance sheet, Watkins wrote to Lay, "Many similar comments are made when you ask about these deals."

"I realize that we have had a lot of smart people looking at this and a lot of accountants including AA&Co (Arthur Andersen & 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 wrote.

The letter proved prophetic when Houston-based Enron filed the largest bankruptcy in US history on December 2. Last week the Justice Department launched a criminal probe of the former energy trading giant. The Securities and Exchange Commission and the Labor Department are also probing its downfall.

The House Energy and Commerce Committee distributed copies of Watkins's letter at a press briefing a day after congressional investigators probing Enron's collapse released partial excerpts from the letter. Spokesman Ken Johnson said Watkins has agreed to be interviewed by the committee.

"We're in the process of setting up a meeting," he said. Johnson called her letter "the first real smoking gun that showed company officials had some knowledge, or at least were warned of a potential problem in advance."

Johnson said the full text of Watkins' letter was released to counter criticism from Enron attorney Robert Bennett. He was quoted in the Washington Post on Tuesday saying, "A committee that professes to be objective is selectively releasing material and putting a spin on it."

Enron could not immediately be reached. Watkins declined comment through her husband and referred inquiries to her attorney, Richard Hilder. He could not be reached.

The accounting firm Andersen, Enron's long-time auditor, said on Tuesday it would fire its partner in charge of auditing Enron's books. The firm said the partner ordered Enron records destroyed after learning federal agents wanted to see them.

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The excerpts from the letter reflected a consistent "tone and tenor" throughout Watkins' letter, Johnson said.

In the seven-page letter discovered among thousands of Enron internal documents being examined by the committee, Watkins referred at length to Enron's accounting for deals involving the off-balance-sheet partnerships Raptor and Condor, just two of many used by Enron to keep debt off its books.

Some of these deals were disclosed by Enron over four years in footnotes to financial statements that have come under fire for referring vaguely to "related parties."

"My concern is that the footnotes don't adequately explain the transactions," Watkins wrote. "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."

Enron, once ranked No 7 on the Fortune 500 list of large corporations, slid in just weeks from industry leadership to bankruptcy court, throwing thousands out of work and stirring controversy from Washington to Wall Street.

After some of the deals involving entities such as Raptor and Condor went sour and parts of the core business slumped, Enron posted its first quarterly loss in more than four years on October 16, took charges of $1 billion against earnings and cut shareholders equity by $1.2 billion.

Further reversals followed and investors began asking questions. A crisis in investor confidence ensued and a series of credit downgrades led speedily to bankruptcy.

In her letter to Lay that was written months before all this occurred, Watkins wrote: "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 but an elaborate accounting hoax."

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