Letter to Enron Chairman Warned of Serious Financial Woes in August

An Enron employee warned company Chairman Kenneth Lay last August that "we will implode in a wave of accounting scandals" unless the company halted practices that eventually sent it into bankruptcy.

Two Republican congressmen, including the chairman of the House Energy and Commerce Committee, on Monday demanded all records relating to a review of the employee's allegations five months ago.

The memo was written by Enron's vice president of corporate development, Sherron Watkins, according to her attorney, Philip Hilder.

In the memo, she relayed her concerns to Lay and met with him for an hour to supply documentation, said Reps. Billy Tauzin of Louisiana, the committee chairman, and James Greenwood of Pennsylvania.

Around the time of the employee's warnings, Lay was telling Enron employees that growth of the energy company "has never been more certain."

"I am incredibly nervous that we will implode in a wave of accounting scandals," Watkins warned Lay in the letter last August. A "veil of secrecy" surrounded Enron's partnerships, which were keeping huge amounts of Enron debt off the company's books, she said. The congressmen released excerpts from the letter.

"It sure looks to the layman on the street that we are hiding losses in a related company," Watkins wrote.

She said several senior Enron employees "consistently and constantly" questioned the corporation's accounting methods to senior Enron officials, including CEO Jeffrey Skilling. Skilling resigned in August.

Attorney Hilder said in a telephone interview from Houston that Enron did respond to Watkins' warning memo. He would not say whether the response was written or spoken.

Lawmakers are likely to ask Lay about Watkins' letter and the response when he appears at two congressional hearings next month. Enron's Washington attorney, Robert Bennett, said Monday that Lay will testify Feb. 4 in his first appearance before Congress since the scandal broke.

Bennett could not be reached immediately for comment on the letter.

Tauzin and Greenwood said senior Enron officials instructed the law firm of Vinson & Elkins to review Watkins' allegations, but instructed the outside attorneys not to second-guess accounting advice and not to analyze the questioned transactions in detail.

The Vinson & Elkins review concluded that the concerns expressed by the Enron employee did not warrant further widespread investigation by independent counsel and auditors, Tauzin and Greenwood said. The review said the employee's information raised no facts that had not been known or disclosed by company officials and auditors.

But the Vinson & Elkins review noted that "there is a serious risk of adverse publicity and litigation" from the partnership transactions, according to the congressmen.

In its limited review, Vinson & Elkins interviewed Andrew Fastow, Enron's chief financial officer who was the lead architect of complex partnerships that allowed Enron to keep debt off its books. Vinson & Elkins also interviewed David Duncan, the partner-in-charge of the Enron account at Anderson, the outside auditor of Enron's books.

On Oct. 16, Enron announced hundreds of millions of dollars in third-quarter losses and a writedown of more than a billion dollars relating to the partnerships. The company filed for bankruptcy Dec. 2.

In another development, Enron's outside accounting firm, Arthur Andersen LLP, said an in-house lawyer spelled out Andersen's document destruction policy for auditors on Oct. 12, four days before Enron announced the huge losses. The Andersen lawyer, Nancy Temple, e-mailed the policy to a partner in the firm's office in Houston where Enron is based.

Andersen is under scrutiny for destroying thousands of documents related to Enron last fall.

"She [Temple] never told the audit team that they should destroy documents for past audit work that was already completed," Andersen said in a statement.

The firm's policy prohibits document destruction under some circumstances and authorizes it under other circumstances.