This chapter will explore professional ethics by analyzing the actions of Sherron Watkins during the Enron Scandal. It will address the actions of Enron executives during the period leading up to the collapse and discuss the role of Sherron Watkins in uncovering the scandal. In particular, we will show that Watkins's actions triggered the chain of events that led to the collapse of Enron. We will also investigate whether Watkins could have done more than she did or if she was simply acting in her own self-interest. By investigating this case, we intend to dissect the complex nature of how to act in compromising situations that may arise at work, thereby providing professionals an example to follow if they encounter a similar situation.
Background: Enron CorporationEdit
Enron is one of the most infamous corporations in history. The company defrauded investors and employees of $14 billion while top executives exercised stock options exceeding $115 million. In its prime, Fortune named Enron the most innovative company for 6 consecutive years. However, to disguise the true financial condition of the company, top executives used aggressive accounting practices (fraud), special purpose entities, and falsified financial reporting. This ultimately led to the collapse of Enron, resulting in the world’s biggest bankruptcy at the time.
Kenneth Lay, Jeffrey Skilling, and Andrew Fastow were the three main conspirators in the Enron scandal. Kenneth Lay was the founder and CEO, until hiring Jeffrey Skilling to take over. Andrew Fastow, the CFO, created and managed several special purpose entities which allowed Enron to isolate financial risk of its specialized assets. A special purpose entity (SPE) is a limited company or partnership that is created to accomplish specific or short-term objectives. Among the largest SPEs Fastow created was LJM. All transactions between Enron and LJM ensured that certain assets were not reported on Enron financial statements . The debt sustained in LJM investments was transferred to four new SPE’s named Raptor I-IV. In court, it would be revealed that Raptor SPE’s resulted in $1.2 billion reduction in Enron’s shareholder equity.
Sherron Watkins has been a certified public accountant since 1983 and holds a masters degree in professional accounting.  She began her career at Arthur Anderson in 1982, then worked at MG Trade Finance from 1990 to 1993. She began working for Enron in 1993, and in 2001, became Vice President of Corporate Development, working directly for Enron's Chief Financial Officer Andrew Fastow. While working for Fastow, Watkins reviewed the assets Enron considered selling. She discovered that a number of Enron's assets were hedged with the Raptor SPE, which was set to have a shortfall, leading to its inability to cover the $700 million she believed it owed Enron.
On August 14, 2001, CEO Jeffrey Skilling resigned. Chairman Kenneth Lay became the CEO and called an all-employee meeting on August 16 to address Skilling's resignation. In response to a request for questions to discuss at that meeting, Watkins submitted an anonymous memo to Lay, detailing her concerns about the accounting problems facing Enron.  At the meeting, Lay urged any employee troubled by Enron’s practices to contact top management. Watkins subsequently consulted Cindy Olson, a member of Enron's top management, to discuss the memo submitted to Lay. Afterward, Olson encouraged Watkins to meet with Lay.
Watkins and Lay met for just over half an hour on August 22. Watkins had prepared five memos totaling seven pages in length that outlined the problems facing the company. Additionally, she provided an analysis of Raptor’s economics and a risk assessment and control group presentation. After their meeting, Lay assured Watkins that he would look into her concerns. Then Watkins returned to work and never brought her concerns to public attention. The memos she presented to Lay were made public in January of 2002 during the Congressional investigation of Enron.
After learning of Watkins's memos, TIME magazine made Watkins its person of the week on January 18, 2002. She was commended for her "pull-no punches, put-it-on record" letter.  At the end of 2002, following the fallout from the Enron scandal, TIME magazine anointed Watkins one of its 2002 persons of the year. In the article entitled "Persons of the Year 2002: The Whistleblowers", TIME lauded her courage in bringing her concerns to the CEO of Enron and starting the investigation that led to the downfall of Enron. TIME praised her as a woman "of ordinary demeanor but exceptional guts and sense".  Furthermore, they said she "did right just by doing [her job] rightly, which means ferociously, with eyes open and with bravery the rest of us hope we have and may never know if we do". 
However, not all the media response was favorable. In the TIME article that named her person of the week the author notes “Watkins never really blew a whistle" and argues a whistleblower would have made the letter public long before August 2001.  Forbes released a much more critical article titled: Sherron Watkins Had Whistle, But Blew It. Far from anointing her a whistleblower, the author likened Watkins actions to a bystander in a bank robbery telling the robber to “stop robbing the bank” while providing him with “ways to avoid getting caught”.  Lay claimed to know nothing of Skilling’s and Fastow’s actions, but should Watkins have believed him?
Analysis of ActionsEdit
Lay, after consulting general counsel, decided Enron should retain an outside law firm to conduct an investigation into Watkins’s concerns. They selected Vinson & Elkins (V&E), assisted by Arthur Andersen, to lead the effort. Both of these groups, however, had been involved in Enron’s dealings, including the SPEs Watkins was questioning . For this reason Watkins specifically asked Lay that V&E not conduct this investigation. Despite this clear conflict of interest, Lay and Enron’s General Counsel went ahead with the selection. They believed “V&E would be able to conduct an investigation more quickly than another firm, and would be able to follow the road map Watkins had provided”  due to its familiarity with Enron matters.
Further hindering the investigation was its severely limited scope. It was determined V&E’s review would not include questioning the accounting treatment and advice from Arthur Anderson, or a detailed review of individual transactions. The specific issues Watkins brought to Lay were not going to be investigated. The results of the investigation were, therefore, largely predetermined by its scope and nature. The groups who helped create Enron’s accounting schemes were now being asked to critique themselves. It is not surprising that V&E concluded the facts revealed in this preliminary review did not warrant a further widespread investigation by independent counsel or auditors. Both V&E and Arthur Anderson had strong motivations to keep Enron operating business as usual. As Gerstein notes, Arthur Anderson was heavily reliant on income from the Enron account. These companies were, therefore, not likely to report on any malfeasance which occurred under their watch.
Not everyone at Enron, however, was as receptive to Watkins’ concerns. Upon learning of her memo and meeting with Kenneth Lay, Andrew Fastow requested Watkins be terminated and wanted her computer seized. As Fastow created and managed the LJM entities, he had significant personal motivations to protect them. He almost certainly knew he would be implicated if a formal investigation was conducted, and therefore worked to keep information from being disclosed. On Enron’s top management Watkins commented “I think Mr. Skilling and Mr. Fastow are highly intimidating, very smart individuals, and I think they intimidated a number of people into accepting some structures that were not truly acceptable". Dissent and questioning of top Enron’s management was discouraged at all levels of the company. This gives us some insight into the corporate culture of Enron, and may help explain why only a few in a company of 20,000 plus employees came forward to voice concerns.
In analyzing Sherron Watkins actions the question remains: did she do enough? After the initial investigation concluded there was no wrongdoing, Watkins went back to work. She could have gone public with her memo and likely prompted a detailed investigation, but decided to keep her actions within the company. It is tempting, therefore, to equate Watkins’s situation to that of Dan Applegate. Both displayed personal motivations for not taking further action. In her memo Watkins wrote “My 8 years of Enron work history will be worth nothing on my resume”. Also when asked at the Congressional subcommittee hearing why she did not confront then CEO Skilling with her concerns earlier Watkins responded “I did not want to do that without the safety net of a job in hand”. In both cases the memos, to some degree, were “CYA” letters, protecting their writers in the case of legal action.
There are, however, important distinctions between the two cases. Watkins did not simply deliver a memo to her immediate supervisor and return to work as Applegate did. Instead she met with the CEO of the company, received his assurances that her concerns would be looked into, and saw an investigation launched. It is easy to look back and say Watkins should have done more, spoken out earlier and gone public when internal actions produced no results. In a conventional sense Watkins is not even a whistleblower. However, she did something no one else at Enron was willing to do. Sherron Watkins met with the CEO, told him the company had a serious problem, and that it needed to be fixed.
Perhaps nothing conveys Watkins's concern better than a line from her sworn testimony to Congress. Regarding why she felt compelled to tell Lay of the problems facing Enron, Watkins states "my understanding as an accountant is that a company could never use its own stock to generate a gain or avoid a loss on its income statement."  This statement is packed with meaning. In essence, her expertise and knowledge of accounting, the core of her professionalism, tells her that something is wrong. She felt a professional obligation to resist Enron's fraudulent accounting practices and to make them known. As professionals, engineers may not encounter fraudulent accounting, but they surely could encounter a situation in which some action violates their professional expertise, leaving them feeling the same way as Watkins. By substituting the words "a professional" in place of "an accountant" in Watkins's statement, this idea becomes evident: "my understanding as a professional is that...". The test for these professionals is how they act when feeling this way. Do they stand up in the name of their profession like Sherron Watkins, or do they merely become a bystander and turn a blind eye toward the situation? Clearly there are many variables to weigh when answering this question. Watkins went through that process. However, when times were most difficult, she let her moral compass of professional ethics guide her to a decision.
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