American Hero Sherron Watkins

February 14, 2002

Text of Watkins' Testimony at House Hearing on Enron

The following is the text of a hearing of the Oversight and Investigations Subcommittee of the House Energy and Commerce Committee on the financial collapse of the Enron Corporation, as recorded by the Federal News Service.

Witness: * Sherron S. Watkins, Vice President of Enron

The Committee is chaired by Rep. James Greenwood of Pennsylvania.

REP. GREENWOOD: (Sounds gavel.) Good morning. This hearing of the Oversight and Investigations Subcommittee of the Energy and Commerce Committee will come to order. And the chair recognizes himself for an opening statement.

"I wish we could get caught. We are such a crooked company." Of all the words in the now famous memo our witness sent to Kenneth Lay in August of last year, these might be the most chilling. According to this morning' witness, the person who uttered those words was a management level of Enron, a team player, a person who probably stood to lose a great deal in any financial collapse at Enron.

What is the truth behind Enron's precipitous collapse? This morning we have before us as our sole witness Ms. Sherron Watkins, Enron's vice president of corporate development. Ms. Watkins has become known as the lone voice who sought to warn Enron chairman and CEO Ken Lay that Enron was in danger of imploding, quote, "in a wave of accounting scandals."

Subsequent events have proved the truth of that unvarnished assessment. What we now understand from evidence this committee has gathered in its investigation, and the materials contained in the Powers Report, and from testimony of senior Enron officials at last week's hearing, that these so-called aggressive accounting practices were used to hide an even larger business failure.

Last week we took testimony from two senior Enron officials, Jordan Mintz; and then treasurer, now Enron president and chief operating officer, Jeffrey McMahon. They too anguished that something was terribly wrong at Enron, but were unable to determine the full extent of the problems or the dangers ahead.

Unlike them, our witness this morning was privy to substantially more evidence of the accounting practices used to hide various related party transactions between Enron and what are known as the Raptor entities -- special purpose entities owned by LJM2, the limited partnership set up and run by Enron and its former chief financial officer, Andrew Fastow.

She will testify today that in her opinion these transactions were outright manipulations of Enron's income statements, booking fictitious income, and hiding actual losses. Ms. Watkins took her concerns right to the top. She wrote a memo to Mr. Lay on August 15th that set forth in stark terms the seriousness of Enron's situation and the dire consequences that would inevitably result if corrective action were not taken -- and soon.

We now know that Ms. Watkins also met with Mr. Lay not just once, as had been previously disclosed, but on two additional times in late October of last year, to further share her concerns and to urge that Enron restate its income statements for the past two years, due to the deceptive transactions with the Raptor's special purpose entities. Yet, until the Powers Report came out two weeks ago affirming her analysis of the Raptors, no one at Enron or Andersen ever sought to address these concerns. Indeed, the actions taken by Enron in October and November of last year to revise its earnings and shareholder equity numbers still fail to address many of the concerns raised by Ms. Watkins, and confirmed by the Powers Report.

Ms. Watkins also will describe today her meetings and conversations with others throughout Enron's corporate hierarchy, as well as with outside advisors. This included Mr. McMahon, associate general counsel Rex Rogers, vice president for human resources Cindy Olson, James Hecker (ph) -- an Enron audit partner -- and Vinson and Elkins managing partner Joe Dilg.

Her initial meeting with Mr. Lay in August prompted an investigation by Vinson and Elkins, assisted by Andersen -- the very two parties Ms. Watkins urged Mr. Lay and others not to include in the review because of clear conflicts of interests. Not surprisingly, the report that Vinson and Elkins issued on October 15th was so flawed that Ms. Watkins seriously considered leaving the company. Instead she persisted in her attempts to convince Mr. Lay of the enormity of the challenge facing Enron, and the failure of outside experts to clearly state the facts.

It wasn't until October 31st that Ms. Watkins learned that a special committee of the board of directors would examine Enron's questionable business practices. This investigation has since become known as the Powers inquiry. Ms. Watkins' appearance and testimony before us today will be the first time anyone has had the opportunity to question her publicly about her own actions, and how individuals at the highest level in the company responded to her warnings.

Let me point out that Ms. Watkins is not a whistle-blower in the conventional sense. She was and is a loyal company employee who sought valiantly, and sadly in vain, to get the people in charge to face the facts and make the hard choices needed to save the company. Ms. Watkins indeed is still an Enron employee, and because of this fact has requested a subpoena compelling her testimony today. I want to point out, however, that she has been responsive to and very cooperative with our investigators, and I look forward to her sharing with the subcommittee and the American public in her own words how it came to be that at the end a once faithful employee concluded that her company was cooking the books. Ms. Watkins, thank you for your help. We welcome your testimony.

The chair recognizes the gentleman from Florida, Mr. Deutsch, for his opening statement.

REP. PETER DEUTSCH (D-FL): Thank you, Mr. Chairman, and thank you, Ms. Watkins, for being here. You know, this is obviously our continuation of trying to understand what happened at Enron, and really looking at it and looking at the future. And I really want to take a couple of second just thanking the chairmen of the subcommittee and the full committee, but also the staff. I think our staff has really done an incredible job over the last about eight weeks or so. And this subcommittee has a long history in the Congress of looking at issues of really cases of failures, of corruption. And Chairman Dingell who led this subcommittee for so many years created almost a historic reputation for this subcommittee, and I believe that this hearing and this process that we are doing is part of that.

I have tried to put in perspective what we are doing and where we hope to lead. And it's not just an investigation for an investigation's sake. But I think all of us at this point -- we know a lot more than we knew a week ago, a lot more than two weeks ago, that the issues I think are much broader than just Enron. The issues really are our capital systems and the transparency in the accounting system. And I think what we all understand is that our economy, which is the strongest economy in the history of the world, one of the reasons that we have that economy is transparency in the capital markets and the public accounting system. And I don't think there's a question that totally abysmally failed in the case of Enron. I mean, I think it's factually accurate that it filed; that trying to understand Enron from its public documents I think was close to impossible. Those documents did not fairly represent the actual state of the company.

And, you know, the secretary of the Treasury when Enron initially filed for bankruptcy said that, Well, this is not a big deal -- companies go bankrupt, they don't go bankrupt -- they're successful, they're not. I take great exception to that. There have been several major companies in America that have gone bankrupt since Enron -- Kmart has gone bankrupt, Global Crossing has gone bankrupt. But I mean there is a fundamental difference. The public markets knew what was going on in those companies -- it was transparent. It was reflected in equity value. People could understand what was going on. In the case of Enron, that was not the case. The seventh largest company in America vaporized in literally a matter of weeks, and the house of cards fell. And as we are looking at transaction after transaction after transaction, and again the number at this point, our understanding is there were 4,000 of these partnerships, and the Raptors were probably the largest, but just a several -- that the method seemed to be continuously used again and again.

I guess the concern we have -- and I have -- but I think all my colleagues share is, number one: You know, How do we protect our capital markets from, number one, this never happening again, because I think that's clearly our goal, that when people try to understand public companies they can understand -- that's the whole point. But, number two, who else is doing this? And obviously I don't think you're going to be able to tell us that today. But I think that is clearly a critical component that you, as someone who was watching what was going on, understood what was going on. And if there are other companies out there that are out there doing this, obviously people in those companies know it as well. And I guess one of the things that hopefully will happen is that it will immediately be reflected in statements and their filings to the SEC. Thank you, Mr. Chairman.

REP. GREENWOOD: The chair thanks the gentleman and recognizes the chairman of the full committee, the gentleman from Louisiana, Mr. Tauzin, for an opening statement.

REP. BILLY TAUZIN (R-LA): Thank you, Mr. Chairman. Let me first thank you, Mr. Chairman, and the incredible work of the Democratic and Republican joint investigatory staff. You have done I think our country a great service, and you continue to do so with these hearings, and I deeply appreciate -- I know I speak for all the members -- your personal commitment to this task.

Let me first observe that as a result of these hearings and the incredible new information that our witness will provide us with today, I think America is learning what went wrong at Enron. More importantly, corporate execs across America are reassessing -- corporate management and board members across America are beginning to ask hard questions and to become significantly more involved and concerned in the operations of their companies.

The SEC has announced its planned reforms. FASB has announced planned reforms. This committee and the committee that we assigned the job of jurisdiction over FASB and the accounting standards in America, chaired by Cliff Stearns of Florida, is beginning the process of recommending legislation to our full committee. Yesterday the subcommittee on Energy of our committee examined the aspects of the Enron collapse on the energy markets of America, and we are investigating allegations of potential damage done. Generally the news is good -- the energy markets held up -- electricity flowed, gas flowed. Somehow companies worked around the financial collapse of Enron and continued to deliver energy at reasonable prices, in fact lower prices, to the American public during this crisis.

And today we will hear from an officer of the Enron Corporation who really knew and who really understood who the culprits were within her own company, and who did her best to make sure that those in control of her company, if they had been kept in the dark, were no longer in the dark, and understood the problems the company faced.

There is a doctrine in law called the last clear chance. It's a doctrine that says that even if you are totally in the right on the highway, if you had the last clear chance to avoid the accident you can still be responsible for what happened.

Our witness today will talk about how she attempted to give the leadership at Enron a last clear chance -- not just to do what was right in correcting its filings with the American public and the investors in this company, but to do what was right in getting rid of culprits, in assigning responsibility, in accepting responsibility, and in correcting the problems, in the hope that there was still a chance to save the corporation from the bankruptcy it now faces.

We will learn whether the company took that last clear chance. I don't think there's anything more prophetic in the document we have now received from our witness describing her evaluation of the culprits, of what happened, who was responsible for it, and what had to be done if the company was going to have a chance to be saved. In the last paragraphs of that memo which our witness handed Mr. Ken Lay on October 30th, I quote: "My conclusions if Ken Lay takes these steps. The bad news: this is horrific. Plaintiff attorneys will be celebrating. The trouble facing the company will be obvious to all. The good news: while speculations will slow down, if not cease, nobody wants Ken Lay's head. He is very well respected in business and the community."

And then she identifies the culprits. The culprits are Skilling, Fastow, Glisson, Causey as well as Arthur Andersen and V&E.

In the final paragraph we find, "My conclusions if we don't come clean and restate, all these bad things will happen to us anyway -- it's just that Ken Lay will be more implicated in this than is deserved, and he won't get the chance, I might add, the last clear chance, to restore the company to its former stature."

What we are learning, and what will be confirmed today, I believe, by this witness, is that we have witnessed an incredible -- an incredible collection of not only miscreants and potential criminal behavior, but a series of abuses of accounting standards and practices, a series of abuses of the American public investing -- the investing public in and its confidence in this company, and its knowledge about its income and it debt, abuse that led to a horrible loss to its employees, not only of their jobs but of their pensions, and abuses that have rocked Wall Street and the investment communities and the corporate boards of America.

If there is any good news in all this, it's that we're finding out what went wrong. We're really getting to the bottom of it, and we're learning how we might turn the corner and begin to make improvements in our laws and our rules to help make sure that no other company experiences this again. But there is other good news, and I say this with deep appreciation, Ms. Watkins, it's the knowledge that there are people like you in this world who are willing to try to make it right, who understand their fiduciary responsibility to their company, and are willing to go out on the limb as you did to make sure that people who could make a difference, who could change things, who could make it right, and who could save that company, did have at least a last great chance to do it.

And there's one other good news. And I have a perspective that I think more and more members are beginning at least to share. There may be other problems in other companies in America -- this is incredibly an aberration. I have never in all of the years of watching companies succeed and fail and bankruptcies -- and there have been some might big bankruptcies in this country -- seen anything like this. When we are through examining it and responding to it, I think the American public will be well served by the process of learning from this experience and the changes we are going to make. And the witness who comes before us will deserve again the appreciation of the American public for doing what she did, and for standing out the way she has.

I deeply appreciate you being here, Ms. Watkins. Thank you, Mr. Chairman.

REP. GREENWOOD: The chair thanks the gentleman. And before recognizing the ranking member of the full committee, would announce that we have apparently two votes before us now. So, after Mr. Dingell's opening remarks, we will recess and make these two votes and come back.

REP. JOHN DINGELL (D-MI): I'm willing to do it whichever way you like, Mr. Chairman -- go no, or go later.

REP. GREENWOOD: Well, I would welcome the gentleman's opening statement now -- REP. DINGELL: Very well.

REP. GREENWOOD: -- and the other members are free to go.

REP. DINGELL: Mr. Chairman, thank you for holding this hearing. And I commend you and the committee for continuing the investigation into the actions that caused Enron, once the seventh largest company in the country, to become the largest bankruptcy in the history of the country.

Each hearing that we have held, and I expect we will be holding more, reveals more of the internal corruption that destroyed Enron, as corruption swept in Enron's top management as well as its in-house and outside accountants and lawyers, all of whom reviewed and approved the transactions that we discussed today. All of them apparently knew that Enron was pledging its stock to guarantee its own hedges with an alleged outside party. This is clearly a violation of all accounting procedures and principles, and apparently one that the Houston office of Arthur Andersen approved over the opposition of its Chicago office. It led directly to a $1.1 billion reduction in Enron's equity, and a $700,000 reduction in earnings. These same people knew that a partnership run by Enron's chief financial officer, who was benefiting greatly from these transaction. All of them, and an unquestioning board of directors did nothing.

I want to thank Ms. Watkins for the heroic efforts she made to help Enron avoid this, in her own words, "implosion and a wave of accounting scandals." Ms. Watkins took the actions that should have been taken months before by many others both inside and outside of Enron with fiduciary duties to the company and to its shareholders. I think we should applaud her. It is never easy to be a whistleblower, particularly in a company where the mentality did not encourage negative news and negative views. Bearers of bad news are often punished.

Today we are going to concentrate on the Raptor transactions, which have been described by the report of the special committee as extremely complex Raptor (?) structured finance vehicles designed to allow Enron to avoid reflecting losses in the value of some merchant investments on its income statement. We cannot fully understand the structure of the vehicles, but we know they are breathtaking in scope, and breathtaking -- (inaudible) -- and in the impact they had. These four vehicles resulted in a write-down of equity, the restatement of earnings, and a credit reduction that sank Enron. Although the Raptors were supposed to take the risk of losses in merchant investments, they actually were guaranteed by Enron stock and used the appreciation in Enron stock value to increase earnings. This is a violation of all basic accounting principles. The accounting shenanigans that permitted such returns were instigated and/or approved by Andrew Fastow, Enron's chief financial officer, Richard Causey, Enron's chief accounting officer, Rick Buy, Enron's chief risk management officer, Arthur Andersen and by Vinson & Elkins, Enron's outside counsel.

The Raptors also benefited greatly LJM-II, a special purpose entity run by Mr. Fastow. Although they were supposed to hedge potential losses in some of Enron's merchant investments, they actually repaid LJM-II's owner investment some generous returns with Enron taking the total risk. As described in an LJM-II presentation to its partners in October of 2000, Raptor-3, for example, paid out $41 million on a $30 million investment in just eight days. This is an amazing 2,503 percent annual return for those investors.

I think it's important to note for the record, Mr. Chairman, that Mr. Fastow, Mr. Causey, Mr. Buy, and Arthur Andersen have all been removed from their positions -- perhaps too late, but they have anyway. But Enron has supported Vinson & Elkins, which approved every single one of these deals for Enron, and then -- (inaudible) -- Ms. Watkins' allegations in a report, finding not a single transaction with LJM was contrary to Enron's best interests to this day. The law firm's written report was issued just one day before Enron announced its equity write-down and earnings and reductions based on the very Raptor transactions that Mr. Watkins brought to Kenneth Lay's attention. I think it would be quite appropriate to devote a hearing to the role Enron's legal counsel played in this fiasco that took $70 billion from the pockets of unsuspecting shareholders and employees. And I note that their role in this does not credit to the profession of which I take pride in being a part.

But today I look forward to hearing from an extraordinary, courageous woman, who has been a bright spot in an otherwise sorry and outrageous saga. Ms. Watkins, we thank you.

Mr. Chairman, I thank you.

REP. GREENWOOD: The chair thanks the gentlemen, and the committee will recess for approximately 20 minutes.

(Recess.) REP. GREENWOOD: The committee will come to order. And the chair recognizes the gentleman from Florida, Mr. Stearns, for an opening statement.

REP. CLIFF STEARNS (R-FL): Thank you, Mr. Chairman. And Ms. Watkins, obviously, like other members, I'd like to take the opportunity to welcome you to our committee and pleased that you're willing to testify. Your status is perhaps not, as the press might outline, that you're a whistleblower. You're not the traditional whistleblower in the sense that you're still working for the company.

And the way you did it was commendable in the sense that you went to different people and talked to them and you asked for a transfer to another part of the company. But in sort of a semantic way, you're not a whistleblower in the traditional sense. I'm not sure if we have a word, which describes when you complain and you stay within the company and work as you did, but it, I think, was very effective and helpful for us.

I believe that employees such as yourself, in no small measure, contribute to the integrity of our commercial system by insisting that all participants play by the rules. And I think all Americans thank you for what you did.

Secondly, I want to explore a number of substantive issues, which you raise in your August 15th, 2001 memo to Mr. Lay that touched upon the efficacy of our financial accounting standards. As part of the full committee's Enron investigation, Chairman Tauzin has asked my subcommittee, which is Commerce, Trade & Consumer Protection, to examine our accounting standards in light of the Enron collapse. As a matter of fact, my subcommittee just concluded a hearing, which examined the adequacy and responsiveness of existing accounting standards.

I believe, as it seems, you may believe also, when you wrote the memo to Mr. Lay, that there is ample evidence that Enron, at a minimum, confused, obfuscated its true financial health from the investing public by using or possibly misusing financial accounting standards.

I now think there is enough evidence to suggest that Enron did not use special-purpose entities such as Raptor as generally accepted accounting principles would authorize it, but they used it to hide poor-performing merchant investments so that Enron would not have to show the declining values that existed on their income statement.

Moreover, it appears that Enron reported the transfer of assets to SPEs as a sale and recognized them as such in its income statement, while it held the third-party investors in the SPE harmless against the risk associated with those assets by pledging its stock as collateral.

I believe this is what you alluded to in your memo when you wrote, and I'm quoting, quote, "If adequately explained, the investor would know that the entities described in our related-party footnote" -- and I assume you meant footnote number 16 of Enron's 2000 annual report -- "are thinly-capitalized. The equity-holders have no skin in the game, and all the value in the entities come from underlying values of the derivative." Unfortunately, in this case, there was a big loss in Enron stock (and NP?). So during the question-and-answer period, I hope we can further explore that. Again, thank you very much for testifying.

REP. GREENWOOD: The chair thanks the gentleman and would urge each of the members, if they could, to keep their opening remarks to as brief as possible so we can move forward with the witness, in view of the fact that we have votes and members will be leaving. The chair recognizes the gentleman, Mr. Stupak, for an opening statement.

REP. BART STUPAK (D-MI): Thank you, Mr. Chairman. I want to thank you, Ms. Watkins, for coming here today. Many of my colleagues and I truly appreciate your brave actions in informing Mr. Lay about the shady accounting that was going on in Enron. It's a shame that he and others on the board and in leadership positions at Enron did not see these problems much earlier. Even now, there's a denial and a lack of acceptability of responsibility by Enron officials in all the hearings we've had thus far to date.

It's also a shame that even after you provided Mr. Lay with a road map of what was going on in Enron, as the Powers report put it, they decided to hire inside counsel to do the investigation into the allegations. That counsel, Vinson & Elkins, was the very law firm that was responsible for providing advice on many of the questionable transactions.

It was no surprise that Vinson & Elkins, in summarizing their findings, stated that Ms. Watkins' concerns were thoroughly investigated but, quoting now, "found not to raise new or undisclosed information," end of quote. Mr. Chairman, we know that once a truly independent firm, one from outside the Enron family, was allowed to review the transactions, they came to a very different conclusion.

Ms. Watkins, you mentioned in your interview with committee staff that when you met with Mr. Lay to discuss your memo, you felt like the child who tells the emperor that he has no clothes. (Inaudible) -- the emperor's new clothes.

And while you're to be commended for coming forward in August of 2001, there was another emperor, Jeffrey Skilling, who was running Enron prior to your August 15th letter. And I have a feeling he knew he had no clothes, and that is why or that is what prompted his resignation.

I'd like to take just a moment to read you, if I may, the final page of Hans Christian Andersen's story. I don't believe he's any relation to Arthur Andersen. (Laughter.) But the last page of the story goes like this. It says, "The emperor shivered, for it seemed they were right. But what could he do? After all, he was the emperor, and people expected him to be dignified. 'I must continue to end the procession,' he thought, so the empire" -- the emperor, excuse me -- "the emperor stood up, just as tall, and his servants went on carrying the train that wasn't there."

Mr. Chairman, reading this, I can't help but think of our last hearing last week with Mr. Skilling and his own parade and his servants, Mr. Winokur and Jaedicke, following behind him, carrying his non-existent robe. I know we're anxious to hear Ms. Watkins' testimony, so I'm going to take your advice and look forward to answering the questions that will be put to you today. So, Mr. Chairman, with that, I'll yield back my time.

REP. GREENWOOD: The chair thanks the gentleman and thanks him for not showing the picture of the unclothed emperor. (Laughter.) The chair recognizes the gentleman from North Carolina, Mr. Burr, for an opening statement.

REP. RICHARD BURR (R-NC): I thank the chairman. Mr. Chairman, we have before us today a witness who I believe can provide the most insight and helpful testimony we have yet to hear in piecing together this affair. With her background as a CPA and a former employee of Andersen, many have described Sherron Watkins as being unique in her ability to bring light on this charade.

I'd add one more uniqueness about Ms. Watkins that was lacking in all the other individuals who have chosen to come before this committee to stop the bleeding at Enron -- a moral compass. In her now famous August memo, she brought to light what she saw as accounting improprieties, most noticeably in the Raptor transactions.

Today she will share with us her observations and concerns that she raised with Enron executives, most noticeably Ken Lay, concerns that fell on deaf ears at the top of the company, while simultaneously this one-time giant fell to its knees.

Mr. Chairman, I could detail what others have done. I think what best details the situation at Enron were the list of songs by the Texas native who just passed away, Waylon Jennings. One song might be, "I Ain't Livin' Long Like This." "Wanted: The Outlaws." "Mama, Don't Let Your Babies Grow Up To Be Cowboys," or just "Some Good Old Boys."

And Andersen could best be described as "Are You Sure Hank Done It That Way?"

However, Waylon's ballad, "A Good-Hearted Woman," could better describe the witness we have before us today.

In all seriousness, thank you, Sherron, for appearing before us. You're doing this committee and your fellow Enron employees a great service. In the New Testament, when Peter stepped out of the boat and walked on water, the miracle wasn't the fact that he walked on water. No, the miracle was that he chose to put his faith in God and step out of the boat, a boat which was his protection but was bound to sink in troubled water. Thank you for choosing to step out of the boat today.

I yield back.

REP. GREENWOOD: The chair thanks the gentleman and recognizes himself for 10 minutes for questions.

Ms. Watkins, when you and I -- oh, I'm sorry. I'm sorry. It's a good thing we have staff here. Ms. Watkins, you're aware that this committee is holding an investigative hearing. And when holding an investigative hearing, it is our practice to take testimony under oath. Do you have any objections to taking your testimony under -- giving your testimony under oath today?

MS. WATKINS: No, I don't.

REP. GREENWOOD: Okay. Do you -- the chair advises you that under the rules of this committee and the rules of the House, you are entitled to be advised by counsel. Do you choose to be advised by counsel today?

MS. WATKINS: Yes, I do.

REP. GREENWOOD: And would you identify your counsel for me?

MS. WATKINS: Mr. Philip Hilder.

REP. GREENWOOD: Okay. Sir, would you spell your last name?

MR. HILDER: Hilder, sir -- H-I-L-D-E-R.

REP. GREENWOOD: Thank you. In that case, if you would please rise and raise your right hand, I'll give you the oath. Do you swear that the testimony you are about to give is the truth, the whole truth and nothing but the truth?

MS. WATKINS: I do.

REP. GREENWOOD: Okay. Be seated. You are under oath, and you are recognized for your opening remarks. You'll probably want to pull that microphone over to you, and it's fairly directional.

MS. WATKINS: Okay. Good morning, Mr. Chairman, members of the subcommittee. I'm Sherron Watkins. And thank you for the opportunity to address the subcommittee this morning.

REP. GREENWOOD: Pull it up a little closer and speak right into it. There you go.

MS. WATKINS: I'm currently employed at Enron Corporation as a vice president. By way of background, I hold a master's degree in professional accounting from the University of Texas at Austin, and I have been a certified public accountant since 1983.

I began my career in 1982 at Arthur Andersen as an auditor. I spent eight years at Andersen in both the Houston and New York offices. I joined New York-based MG Trade Finance in 1990 to manage their portfolio of commodity-backed finance assets. I held that position until October of 1993.

In October of 1993, I was hired by Mr. Andrew Fastow and moved back to Houston to manage Enron's newly-formed partnership with CALPERS, the California Public Employee Retirement System. The partnership was the Joint Energy Development Investments Limited Partnership, or JEDI. I held the JEDI management portfolio position until the end of 1996.

From 1997 until early 2000, I worked for Enron International, primarily in the Mergers & Acquisitions Group, which is also known as the Corporate Development Group. In early 2000, I transferred to Enron Broad-Band Services. I worked there until June of 2000 in a variety of roles.

In mid to late June of 2001, I went to work directly for Mr. Fastow, assisting in the corporate development work that had been put under his supervision after Cliff Baxter resigned in May of 2001. I worked for Mr. Fastow in this new role into late August 2001. I have since been reassigned into the Human Resources Group, with a variety of assignments.

While working for Mr. Fastow in 2001, I was charged with reviewing all assets that Enron considered for sale and determining the likely economic impact of sale. As part of the sale analysis, I reviewed the estimated book values and market values of each asset.

A number of assets were hedged with an entity called Raptor. Any asset that was hedged should, for the most part, have a locked-in sales value for Enron, meaning that despite current market prices, Enron should realize the hedged price of the Raptor.

It was my understanding that the Raptor special-purpose entities were owned by LJM, a partnership run by Mr. Fastow. In completing my work, certain Enron business units provided me with analyses that showed certain of the hedged losses that had been incurred by Raptor were actually coming back to Enron. The general explanation was that the Enron -- (inaudible) -- the Raptor hedge had declined in value such that Raptor would have a shortfall and would be unable to fully cover the hedge price that it owed Enron.

I was highly alarmed by the information I was receiving. 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. I continued to ask questions and seek answers, primarily from former co-workers in the Global Finance Group or in the business units that had hedged assets with Raptor. I never heard reassuring explanations.

I was not comfortable confronting either Mr. Skilling or Mr. Fastow with my concerns. To do so, I believe, would have been a job- terminating move.

On August 14th, 2001, I was informed of Mr. Skilling's sudden resignation, and felt compelled to inform Mr. Lay of the accounting problems that faced Enron. I sent Mr. Lay an anonymous letter on August 14th, 2001, in response to a request for questions for an upcoming all-employee meeting to be held August 16th, to address Mr. Skilling's departure.

At the all-employee meeting, Mr. Lay commented that our visions and values had slipped, and that if any employee was troubled by anything at Enron, please bring those concerns to him or any number of the top management, including Cindy Olson, Steve Kane and others.

On August 16th I met with Ms. Olson to show her a copy of the letter and discuss it with her. She encouraged me to meet with Mr. Lay personally. Since Mr. Lay was traveling through the rest of the week, she said the meeting would probably take place the week of August 20th. I was concerned that Mr. Lay was planning to fill the Office of the Chair over the weekend, and that he might choose Mr. Fastow or Rick Causey, the chief accounting officer. To voice my concerns, I met with Rex Rogers, Enron's associate general counsel on Friday, August 17th, 2001. I provided Mr. Rogers with a version of the anonymous letter, as well as two additional memos, all of which are part of the seven pages that this committee discovered in mid June 2002 -- I mean, January 2002. On Monday, August 20th, 2001, Mr. Lay's assistant scheduled a meeting for me to meet with Mr. Lay that following Wednesday, August 22nd, 2001. I subsequently held discussions with a former mentor at Andersen, James Hecker (sp), and a long-time friend and co-worker, Jeffrey McMahon, to vet my concerns before my meeting with Mr. Lay.

I met with Mr. Lay on the afternoon of Wednesday, August 22nd, 2001. The meeting lasted just over one half hour. I provided him with five memos I had drafted to help explain the problems facing the company. These five memos constitute the seven pages this committee discovered and subsequently disclosed on January 14th, 2002. Additionally, I provided Mr. Lay an analysis of the Raptor entity economics and a presentation prepared by Enron's risk assessment and control group.

I primarily used the memo titled "Summary of Raptor Oddities" as talking points with Mr. Lay. My main point to Mr. Lay was that by this time Raptor owed Enron in excess of $700 million under certain hedging agreements. My understanding was that the Raptor entities basically had no other business aside from these hedges; therefore, they had collectively lost over $700 million. I urged Mr. Lay to find out who lost that money. If he discovered that this loss would be borne by Enron shareholders, via an issuance of stock in the future, then I thought we had a very large problem on our hands. I gave Mr. Lay my opinion that it is never appropriate for a company to use its stock to affect its income statement.

At the conclusion of the meeting, Mr. Lay assured me that he would look into my concerns. I also requested a transfer, as I was uncomfortable remaining as a direct report to Mr. Fastow.

I intend to fully cooperate with the subcommittee, and I now welcome the opportunity to answer any questions the members may have at this time.

REP. GREENWOOD: Thank you very much for your testimony, Ms. Watkins. And we all thank you again for being here. The chair recognizes himself for 10 minutes for inquiry.

Ms. Watkins, when we spoke yesterday you described that in your earlier days working for Mr. Fastow the special purpose entities were basically legitimate; they seemed to be garden variety securitized entities that were designed to do legitimate -- serve legitimate financial purposes, with which you had no qualms. And as you described -- and I think Condor was one of those early SPEs that fit that category.

As you described your time with the company, it seemed to me that it was like the story of the frog and the pot on the stove: that gradually, largely directed by Mr. Fastow, I understand, the rules of the game began to change, and the legitimacy of these entities and partnerships began to be stretched, till finally we end up with something like the Raptors, which seem to serve no legitimate -- and perhaps not even a legal -- purpose. And it seemed to me that the difficulty was that the corporate culture was slowly acclimated to this transition from what was quite legitimate to what was clearly not legitimate.

Let me ask you this specific question: Is it your opinion that the Raptor transactions then were nothing more than sheer income statement manipulation? And if you do think that, why do you say so?

MS. WATKINS: That is my opinion, and it is my opinion because true economic risk was not passed to a third party. Raptor owed Enron in excess of $700 million, and there was not an outside third party that bore that loss. It was going to be borne by Enron shareholders by an issuance of stock in the future.

REP. GREENWOOD: Explain how that affected the income statements.

MS. WATKINS: Well, the -- Raptor was hedging with -- REP. GREENWOOD: Again, if you would pull the microphone a little closer -- the silver one is the one that actually broadcasts into the room here.

MS. WATKINS: The Raptor hedges were locking in supposedly sales value that Enron had on equity investments that it had made. The investments that were probably the more volatile was a tech investment in Avichi (ph) and the new power company, a start-up that Enron had done. Those investments were hedged with Raptor. They had dropped significantly in value. And in the related-party footnote in 2000, it mentions that Enron had recognized $500 million of revenue from the special entities, offsetting a corresponding write-down in the equity investment portfolio of Enron. I think that tended to make readers think that it was a $500 million gain, offset by a $500 million loss; therefore zero impact on the income statement. However, without the Raptor transactions Enron would have had a $500 million loss, not covered by any gains, running through the 2000 income statement.

REP. GREENWOOD: As you came to understand this, prior to your meeting, your first meeting with Mr. Lay, did you discuss these concerns with other employees at Enron?

MS. WATKINS: As I was doing my work and looking at these Raptor -- these assets hedged by Raptor, my concern was that it seemed to be just common knowledge that the Raptor losses were backstopped by Enron stock. And an analysis was always looked at -- what's the value of Enron stock compared to the money Raptor owes us? And I was shocked that people could explain this to me with no concern in their voice, like there was some magic structure that Enron and Andersen had come up with to make this work.

REP. GREENWOOD: And did it seem to be -- did you get the impression, or was it said to you others that they thought that this was perfectly legitimate, or that it was shaky but everyone is going along with the deal?

MS. WATKINS: There were people like Mr. McMahon and others that had expressed concerns about LJM and the transactions Enron was doing with LJM. But for the most part people seemed to think there was some accounting rule that was allowing this to be acceptable. It was very common knowledge. It wasn't hidden.

REP. GREENWOOD: Did you watch Mr. Skilling's testimony before this subcommittee last week?

MS. WATKINS: Yes, I did.

REP. GREENWOOD: Would you care to comment on how you reacted as you heard Mr. Skilling describe his awareness or lack of awareness or understanding of these transactions?

MS. WATKINS: Well, I would like to use Mr. Skilling's own words to describe what I thought about his testimony. He was interviewed by Enron's in-house newsletter in 2001. In the interview Mr. Skilling was asked, “What's the best advice you ever received?” And his reply was, "If it doesn't make any sense, don't believe it." (Laughter.)' REP. GREENWOOD: Did you confront Mr. Skilling himself with this concern?

MS. WATKINS: No, sir, I did not.

REP. GREENWOOD: Why did you not?

MS. WATKINS: I did not want to do that without the safety net of a job in hand. I felt like it would be an immediate job-terminating move. Frankly I thought it would be fruitless, that nothing would happen.

REP. GREENWOOD: And what led you to -- did you have other experiences or were there experiences of others that led you to believe that that might be -- that you might be putting your job on the line if you were to confront Mr. Skilling -- or Mr. Fastow for that matter -- with these concerns?

MS. WATKINS: Basically it appeared that the Raptor transactions had been going on for a number of years. My understanding was that Mr. Skilling was fully aware of them. He is a very hands-on manager. I had also heard rumors that people as close to him as Mr. Baxter had complained to him and he had done nothing. So I really felt it was fruitless to go to Mr. Skilling.

REP. GREENWOOD: Do you think it's possible that Mr. Skilling was unaware of the natures of these transactions?

MS. WATKINS: No, I do not.

REP. GREENWOOD: Could you tell us why that's not possible? He seemed to have forgotten about them.

MS. WATKINS: He is a very much intense, hands-on manager. He was very involved in Mr. Fastow's endeavors, and I find it very hard to believe that he was not fully aware of transactions with Mr. Fastow's partnerships.

REP. GREENWOOD: Now, did Mr. Fastow learn that you had communicated your concerns to Mr. Lay?

MS. WATKINS: I did find out that he found out that I was the writer of the anonymous letter, and that I had also met with Mr. Lay. I found that out August 30th, 2001.

REP. GREENWOOD: And how did he respond? Did he name you employee of the month? (Laughter.) MS. WATKINS: Well, Ms. Olson told me that she and Ken Lay were both highly alarmed by Mr. Fastow's reaction: he wanted to have me fired, he wanted to seize my computer.

REP. GREENWOOD: Wanted to have you fire? He told people he wanted to have you fired?

MS. WATKINS: That's what Ms. Olson told me.

REP. GREENWOOD: Okay. And he wanted your computer?

MS. WATKINS: Yes.

REP. GREENWOOD: And did he obtain your computer?

MS. WATKINS: Ms. -- he did, but Ms. Olson basically said, Let me send you to your office with an IT person -- here's a new laptop -- transfer whatever files you want to on the new one -- delete whatever ones you want to on the old one -- we'll just hand him the hardware. She said, “You don't mind doing that, do you?” And I said, “No, I don't.” (Laughter.)

REP. GREENWOOD: So you pulled a fast one on Andy. Let's get to your face-to-face meeting with Mr. Lay. Could you describe how he reacted and what your impression of his reaction is, and particularly with regard to what extent it seemed to you, based on his comments, his reactions, that the news that you were bringing to him was surprising or not surprising, was alarming or not alarming, and to what extent it seemed to you that he had an appropriate response that would have convinced you or given you some comfort that he was in fact going to deal with this?

MS. WATKINS: Well, he -- he tried to put me at ease. He knew this was probably difficult for me to do, and he recognized that. I handed him my set of documents, and directed him to the Summary of Raptor Oddities document as a talking point. He seemed to take it very seriously. In fact, when he read the quote that I put in that memo about the manager-level employees saying, "We're such a crooked company," he winced. You know, that seemed a painful comment to him. He was aware that these Raptor transactions had been presented to the board. But I -- I said my understanding of the way these things are generally presented -- it's high-level summaries, and I am not so certain that the true nature was fully disclosed. And he contended that I might be right. And by the end of the discussion he certainly said he would look into it and order an investigation, and ask me what would -- what could he do for me, which was when I requested the transfer out of Mr. Fastow's group.

REP. GREENWOOD: Okay, my time has expired. The chair thanks the recognizes for gentleman Mr. Dingell for 10 minutes for purposes of inquiry.

REP. DINGELL: Mr. Chairman, I thank you. Again, I commend you. Ms. Watkins, I want to commend you also. I hope you'll understand these questions are friendly, but our time is limited so I therefore have to ask them in a way that gives you an opportunity to answer where possible yes or no. I will be working from a document, which is entitled "Outlines of Points to Discuss with Ken Lay and Jim Derrick."

Ms. Watkins, you specifically asked that Vinson and Elkins not do this investigation. That was because they had approved many of the LJM deals, as attorney for Enron, is that correct?

MS. WATKINS: Yes sir, it is.

REP. DINGELL: Now, I want to refer you to the document that I have just mentioned. This is a document, which was prepared by Vinson & Elkins on the result of their investigation. And Jim Derrick is Enron's general counsel, is he not?

MS. WATKINS: Yes, he is.

REP. DINGELL: Ms. Watkins -- and in this document it says that Jim Derrick decided not to engage and independent accountant, as you had recommended. Is that correct?

MS. WATKINS: Yes.

REP. DINGELL: The caveat on the investigation was that they should not second-guess the accounting treatment, they would not do a detailed transaction analysis, and there would be no discovery-style investigation. Did you know that at this particular time or at some later time?

MS. WATKINS: I was not aware that the investigation was being limited. I met with Vinson & Elkins on September 10th for roughly three hours and had no indication that it was a limited investigation. I only discovered that it was limited when I -- when I read their October 15th response, which was not provided to me -- read it off of this committee's web page.

REP. DINGELL: It is fair to say that this then was not much of an investigation, was it?

MS. WATKINS: I don't think so.

REP. DINGELL: Vinson & Elkins said that with all these caveats, there was no problem except a cosmetic one, is that correct?

MS. WATKINS: That is what they concluded.

REP. DINGELL: And on page seven, Vinson & Elkins tells Ken Lay that Enron's stock is being used to support transactions with Condor and Raptor. Enron was getting earnings through derivative transactions with Raptor when it could be argued that there was no third party involved, and because of the falling value of both Enron's stock and asset value, the question was raised as to who bears the loss. These are exactly the same questions you had asked earlier, isn't that so?

MS. WATKINS: Yes sir.

REP. DINGELL: Now, then Vinson & Elkins says at page eight of the document, notwithstanding these bad cosmetics, Enron representatives uniformly stated that Condor Raptor vehicles were -- (inaudible) -- useful vehicles that benefited Enron. What this says to me is that everyone -- Vinson & Elkins, Ken Lay, Jim Derrick, and all the people they interviewed knew that these were not special purpose vehicles that bore risk, is that correct?

MS. WATKINS: It would appear to be so, yes.

REP. DINGELL: And they knew that they were in bad financial shape, did they not?

MS. WATKINS: Yes.

REP. DINGELL: And they had approved them, had they not?

MS. WATKINS: Yes.

REP. DINGELL: So, when high-level officials say they didn't know about those vehicles, can that be true?

MS. WATKINS: No. They knew about they vehicles.

REP. DINGELL: No, what do you think all these people expected to happen at this point in September 2001?

MS. WATKINS: I think what's -- what's interesting to note is that it says here the "Raptor vehicles were clever, useful vehicles that benefited Enron." I think that there was an understanding that Andersen and Vinson & Elkins had blessed these things, that -- you know, when I met with Rex Rogers on August 17th, he said, "Sherron, how could you possibly be right? I mean, Andersen and Vinson & Elkins would not risk their firms giving us wrong advice. They've blessed these structures." And so I -- I think that certain people at Enron thought that these were complex but clever and that they were legitimate.

REP. DINGELL: So, now -- so here we have a situation where Vinson & Elkins does -- I think they had to -- some kind of due diligence or gave legal advice to Enron on these matters, is that not so?

MS. WATKINS: Yes sir.

REP. DINGELL: The accountant was in a similar position, both as accountant and as consultant, is that not so?

MS. WATKINS: Yes, that's right.

REP. DINGELL: So, am I fair in inferring from this that their statements about the character of these devices as being of benefit to Enron was in error?

MS. WATKINS: Well, a benefit to Enron, if you consider that we were meeting financial statement targets that we had told investor- analysts, but you can't meet those targets falsely.

REP. DINGELL: So, they were -- they were essentially represented as being of benefit in the meeting of targets, which could not be met?

MS. WATKINS: Yes sir.

REP. DINGELL: Mr. Chairman, in the interests of time, I would like to just ask unanimous consent to introduce the document to which I have referred. And again, Ms. Watkins, you are a women of extraordinary courage. We thank you for your assistance.

REP. GREENWOOD: Without objection, the document to which the gentleman from Michigan refers, and all of the other documents in the binder will be made a part of the record. The chair recognizes the gentleman, Mr. Tauzin.

REP. TAUZIN: Thank you, Mr. Chairman. First, Ms. Watkins, I apologize that we scheduled this hearing on Valentine's Day. I want to wish you Happy Valentine's.

MS. WATKINS: Thanks.

REP. TAUZIN: I want to refer specifically to the document, which you handed Ken Lay on October the 30th. That document has been widely publicized in the last several days. Some have characterized it as an attempt to describe a public relations effort to help the company through this problem. I want you to tell me whether the facts outlined in that document are, to your best knowledge and belief, true.

MS. WATKINS: Yes sir. I was providing this to Mr. Lay as a concept on public relations, however, I felt it was a truthful public relations strategy in it was something I felt should be -- should be said.

REP. TAUZIN: So that the things you recommended that Mr. Lay say and do are based upon facts in this document that you believe to be true?

MS. WATKINS: Yes. I do believe that Mr. Skilling and Mr. Fastow, along with two very well respected firms, did dupe Ken Lay and the board.

REP. TAUZIN: Most specifically you say that. You say that as CEO, Mr. Lay relied upon his COO, Mr. Skilling, as well as CFO Fastow, and CAO Causey, to manage the details. Is that correct?

MS. WATKINS: Yes.

REP. TAUZIN: Is that accurate? Did Mr. -- was Mr. Skilling expected to manage the details of these transactions?

MS. WATKINS: From all the records and the presentations that I have reviewed, Mr. Skilling was supposed to be an integral part of the controls and the review process with the LJM transactions.

REP. TAUZIN: Now, did you his -- did you see Mr. Skilling's testimony last week before this committee?

MS. WATKINS: Yes sir, I did.

REP. TAUZIN: Did you specifically hear his testimony regarding the LJM approval sheets?

MS. WATKINS: Yes, I did.

REP. TAUZIN: Now, he basically testified that he never saw these sheets and he was not required to sign them, that's why he didn't sign them. Is it your testimony that he in fact knew about these sheets?

MS. WATKINS: Well, all I can say is -- all I can speak to is that it was Enron's very strict policy, when completing transactions and deals, to have deal sheets, deal approval sheets, and there was never a name put on the approval block that was not required. And I don't ever remember an instance where signatures were not obtained for every person listed.

REP. TAUZIN: So that if Mr. Skilling's name consistently appears on the sheets but it remains unsigned, it was not because he was not obligated to sign it, it was because he just didn't sign it.

MS. WATKINS: That's correct.

REP. TAUZIN: Is that correct?

MS. WATKINS: That's -- that would be my understanding of our very strict procedures, yes.

REP. TAUZIN: Were those procedures that Mr. Skilling would have understood?

MS. WATKINS: Yes.

REP. TAUZIN: You say that, also in the memo, that Mr. Lay, should admit that he trusted the wrong people. Are you saying that Mr. Lay was wrong to trust Mr. Skilling and Mr. Fastow and Mr. Causey with these details?

MS. WATKINS: yes sir, I do believe they mis-served Mr. Lay, the board, Enron and its shareholders.

REP. TAUZIN: In fact, you go on to say that Ken Lay his board were duped by a COO who wanted the targets met no matter what the consequences, a CFO motivated by personal greed, and two of the most respected firms, Arthur Andersen and company and Vinson & Elkins, who had both grown too wealthy off Enron's yearly business and no longer performed their roles as Ken Lay, the board, and just about everybody on the street would expect as a minimum standard for CPAs and attorneys. Do you believe that statement to be true?

MS. WATKINS: Yes sir, I do.

REP. TAUZIN: You say further on, "the culprits are Skilling, Fastow, Glisson, Causey, as well as Arthur Andersen and Vinson & Elkins." Do you believe that statement to be true?

MS. WATKINS: Yes sir, I do.

REP. TAUZIN: Now, in Mr. Skilling's testimony, he very specifically denied any knowledge that in these transactions Enron Corporation had not properly transferred the risk to cover the losses. Do you believe that statement to be true?

MS. WATKINS: No, I do not. Mr. Skilling was a great proponent of looking to the markets to make sense of a transaction. And I doubt we could have hedged these volatile stocks with any true unrelated third party at the prices that we were actually able to obtain from Raptor.

REP. TAUZIN: Is it your testimony, then, that Mr. Skilling must have known about the details of the Raptor transaction to know that risk had not transferred?

MS. WATKINS: It is my opinion that he was probably aware that we could not have transacted at those prices with an unrelated third party, and the only reason Mr. Fastow was transacting with Enron through the Raptor transaction at those prices for volatile stocks was that Mr. Fastow could not lose money and he was backstopped by Enron stock.

REP. TAUZIN: Ms. Watkins, you made it as clear as I've ever seen anybody make it. You basically outlined for Mr. Lay what would happen if he did the right thing -- cleaned up this mess, reported correctly to his stockholders and investors, if he got rid of the culprits and if he made these public statements on behalf of the corporation, that he, in fact, was going to do everything to save his company; and that if he didn't take that advice, you told him, the worst is going to happen, it's going to happen anyhow, and Mr. Lay will be more implicated in this than is deserved. What did you mean by that?

MS. WATKINS: Mr. Lay was back at the helm as CEO. And it is my humble opinion that he did not understand the gravity of the situation the company was in.

REP. TAUZIN: Now, you explained to him, as the chairman has outlined, in rather detailed form, what you thought was wrong with Raptors, what you thought was wrong with these transactions. Did he understand the gravity, the implications of what you were telling him, in your opinion?

MS. WATKINS: In my opinion, I don't think he did. And I have that opinion because at an October 23rd all-employee meeting to discuss the (write-downs?) that had occurred in the third quarter, there were several questions about Raptor and about the LJM transactions. And Mr. Lay likened the problem the company was now facing to a 1980s problem, when the Peruvian government nationalized an oil company Enron had, to the (J-Block?) problem Enron had in 1997. And I don't think an accounting manipulation problem is in any way related to a -- REP. TAUZIN: You're saying he didn't get it.

MS. WATKINS: No.

REP. TAUZIN: He didn't get it. Now, as I understand your memo to him, you're basically telling him that these officials of his corporation were engaging in these essentially improper activities, were doing it in a way that he and his board were being duped, kept in the dark.

Who had the power to protect those people from discovery from Mr. Lay and his board? Who had the power to allow these activities to go forward by all of these employees, including investing themselves in some of these outside partnerships and entities at great profit? Who had the power to let all that happen and keep that information from the board and Mr. Lay all that while?

MS. WATKINS: My opinion would be that would be Mr. Skilling.

REP. TAUZIN: And finally, Ms. Watkins, I refer you to the document entitled "Lessons Learned," tab eight. In that document, there are three points: Recognizing, in effect, the accounting hedge versus an economic hedge; the operation should consider hedging assets in Raptor to minimize credit capability volatility. The new Raptor structure transferred risk in the form of stock dilution. Did you show this document to Mr. Lay?

MS. WATKINS: Yes, I did.

REP. TAUZIN: Now, it changes handwriting. Whose handwriting is that?

MS. WATKINS: That's my handwriting.

REP. TAUZIN: The handwriting basically says, to the final point, "There it is. That is the smoking gun. You cannot do this." What did this mean?

MS. WATKINS: Well, my concern was that this was a document Enron had produced. It was well-known. And what that bullet point is trying to say in plain English is that the new Raptor structure transferred income statement equity investment risk in the form of stock dilution. And you can never use your stock to invest the income statement.

REP. TAUZIN: You just can't do that legitimately, legally.

MS. WATKINS: That's correct.

REP. TAUZIN: Where'd you get this document?

MS. WATKINS: From the risk assessment and control group, run by Mr. Richard Buy.

REP. TAUZIN: And, if I may, what was Mr. Lay's reaction to this document when you showed it to him?

MS. WATKINS: He was concerned. He was concerned with everything I was telling him.

REP. TAUZIN: There's another note you wrote on the second point. "The corporation isn't Raptor. How could corporation consider anything at Raptor?" What'd you mean by that?

MS. WATKINS: Well, the bullet point just -- this is "Corp should consider hedging assets in Raptor to minimize problems." And if Raptor is supposed to be Mr. Fastow's company, then it's Mr. Fastow's problem. Why should Enron Corporation -- REP. TAUZIN: It's not the corporation.

MS. WATKINS: -- consider anything (there?)? Exactly.

REP. TAUZIN: Even with this, you still say he didn't get it.

MS. WATKINS: I don't think so.

REP. TAUZIN: Thank you, ma'am.

REP. GREENWOOD: The chair thanks the gentleman and recognizes the gentleman from Florida, Mr. Deutsch, for 10 minutes.

REP. DEUTSCH: Thank you, Ms. Watkins. Someone reading through Enron's (statement?), would they have a perspective that those statements fairly represent the status of the company prior to the -- (inaudible)? MS. WATKINS: I don't think so. I think that related-party footnote is wholly inadequate in describing the transactions with Mr. Fastow's partnership.

REP. DEUTSCH: Okay. So I think all of us would probably agree with what you just said. How was that able to happen? How were we able to get to the seventh-largest company in America, under what we consider general accounting principles, that those statements are supposed to fairly represent what's going on in the company, and you and me and, I think, anyone who's looked at this could come to the same conclusion that they do not? How did that happen?

MS. WATKINS: It's inconceivable, and I don't understand how it happened.

REP. DEUTSCH: And obviously it happened. I mean, at some point in time, someone had to have had discussions between people at Enron and their accountants, Arthur Andersen, and their attorneys, Vinson & Elkins. I mean, are you aware of discussions that would have allowed it to happen?

MS. WATKINS: I can really just point to what Mr. Stupak said in "The Emperor's New Clothes." There were swindlers in "The Emperor's New Clothes" discussing the fine material that they were weaving. And 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.

REP. DEUTSCH: This is somewhat of a sidelight, but I think something significant. At the time that you were obviously aware of what was going on -- I mean, that the statements of the company did not reflect, in fact, huge losses, in the billions of dollars, so what the value of Enron was, as reflected in its stock price, was not its true value, and there were people obviously in Enron that knew about this.

And apparently what we know -- and I'm trying to get a copy at this point, but it's a public domain at this point -- that effectively dozens of management people were selling hundreds of millions of dollars worth of stock at this period of time. So obviously people knew what was going on because my recollection is that there was only one actual purchase with dozens of sales.

Was that the sort of culture of what was going on in terms of the inside management at this point in time, understanding, in fact, what you uncovered and what we know now, that the value was not -- that the liability of these Raptors was not reflected in the statement?

MS. WATKINS: It's hard for me to say about executives who sold stock, because so many of them thought that somehow or other this was legitimate. I'm -- REP. DEUTSCH: Legitimate, but they also knew that there was an actual loss out there; and legitimate also that it seems as if everyone understood that the partnership could never make good on that loss. So there was -- so people actually understood the partnership, understood that eventually that loss was going to come back to Enron.

I mean, it might have been legal, but as a practical matter, in terms of the value of the company, I can't imagine how they wouldn't know that there was going to be a day of reckoning at some point in time.

MS. WATKINS: You could be right. I can't really speculate. But there was a feeling -- I mean, Enron is a very arrogant place with a feeling of invincibility. And I'm not certain people felt like it was that imminent. They just felt like Mr. Fastow, along with the accountants, would come up with some magic in the future.

REP. DEUTSCH: Was there any thought at all -- because, again, I guess what I'm hearing you say and what I've looked at this point is that anyone -- and I don't think you have to be a Harvard MBA at this point or an Arthur Andersen partner to understand that there were liabilities were not requested in the balance sheet of (the company?), huge liabilities, in the billions of dollars. And if you knew that and the market and the transparency of the public markets, you knew the stock was going to go down at some point.

Was there any concern at all for shareholders, for employees who had 100 percent of their life savings in 401(k)s, to retired people throughout the country who had investments in Enron stock, who really have been devastated by this collapse of Enron? And was there any thought, any discussion of what this would mean to actual shareholders?

MS. WATKINS: I never heard any discussion.

REP. DEUTSCH: Did you have any sense at all that there was any concern for shareholders at all?

MS. WATKINS: I don't recall any discussions of concerns like that.

REP. DEUTSCH: You have testified -- and, you know, you have used the word, I guess, "improper." I feel comfortable using the word "illegal," because, you know, I guess sometimes I debate whether to go into -- you know, what level of detail in terms of these transactions. But I think we have to go into some detail really to understand them, and also just to have it on the record in this sense.

The hedging, okay, of (Vichy?), all right, that would have been a normal business decision. What was the original investment of the (Vichy?)? Do you know the details?

MS. WATKINS: I don't have exactly what was -- REP. DEUTSCH: Do you have a ballpark number?

MS. WATKINS: I really don't. I think it was under $10 million.

REP. DEUTSCH: Okay, and what was the price when the hedge was put into effect, the value?

MS. WATKINS: I believe around $166 or $170 a share.

REP. DEUTSCH: So the value was $166 million at that point or more?

MS. WATKINS: Enron's value was probably in excess of $150 million by then.

REP. DEUTSCH: Okay. So the idea was to hedge that increase. And what you have said and what you've testified to is, first of all, could they have gone to a legitimate third party, an investment bank, to buy a derivative, to buy a put for the strike price? Was that available?

MS. WATKINS: I believe we had some hold restrictions on the stock, but probably there were some transactions, derivative transactions, that were available to us from unrelated parties.

REP. DEUTSCH: Okay. And, again, just to kind of walk through the specific transaction, so in a ballpark number, what would an unrelated third party ask for to sell that type of put to lock in that gain? Just a ballpark number.

MS. WATKINS: Well, I don't think you could have locked it in at that $170 price.

REP. DEUTSCH: Right.

MS. WATKINS: There would have been a significant haircut to that price.

REP. DEUTSCH: Right. Can you use real numbers?

MS. WATKINS: As much as -- REP. DEUTSCH: I'm sorry. What?

MS. WATKINS: As much as -- as much as, I would say, 30 or 40 percent.

REP. DEUTSCH: Okay. And that strike price would be what number?

MS. WATKINS: Probably more like $120 or $110; maybe even lower. I'm –

REP. DEUTSCH: Okay. And then what was the price that was sold by the partnership, by the Raptor?

MS. WATKINS: I don't believe that we have sold it. I believe the (Vichy?) is selling for –

REP. DEUTSCH: No, no, the put.

MS. WATKINS: I think $170 a share.

REP. DEUTSCH: No, no, but what was the -- what did it cost Enron to buy it from this partnership?

MS. WATKINS: I'm not familiar exactly with those details.

REP. DEUTSCH: A ballpark, about –

MS. WATKINS: Well, I don't know exactly how the Raptor puts or fees were paid. I do know that approximately 35 million went to Mr. Fastow or went to LJM out of the Raptors, and that that was supposedly representing fees. But that was for all of the –

REP. DEUTSCH: Right, and I guess -- this is where, you know, I think we have crossed the line of a legal activity. Because what I hear you saying is that that transaction which you have just described, which was one of many transactions -- and basically there was this sort of cookie cutter of locking this in. And what appears to have happened is Arthur Andersen and Vinson and Elkins basically gave approval for this cookie cutter in terms of basically locking in value -- you lock in the gain on the balance sheet as a gain. Then you basically have this sham transaction. And that's the whole point.

What you seem to be absolutely I think convinced of, and what I am as well, is that if a third party would have sold it at a market price and this sort of partnership which was headed by the CFO of the company, Mr. Fastow, as head of the general partnership as the general partner, basically selling it to yourself, and it's at a different price than a third-party price. By definition, you know, it's not an arm's length transaction. I mean, by definition, if the price is so significantly different. That's number one. And, number two, what is absolutely clear -- and I think just trying to elaborate on this a little bit, getting into some of the details, that there really -- the transaction never really existed, because as opposed to guaranteeing the gain, the general partnership -- no one in this transaction ever -- I mean, ever contemplated that the general partnership could ever guarantee the gain. I mean, they could only guarantee the gain if the stock went up and Enron's stock went up. Is that accurate?

MS. WATKINS: Yes, it is. The saying around Enron was that heads, Mr. Fastow wins; tails, Enron loses.

REP. DEUTSCH: And that obviously is not a transaction?

MS. WATKINS: No.

REP. DEUTSCH: That's not a business transaction. I mean, that's not a transaction that -- I mean, could you contemplate in any shape, manner or form that there was a business purpose?

MS. WATKINS: No, other than -- other than making sure those losses were not borne by Enron's financial statements, which is not economic.

REP. GREENWOOD: The time of the gentleman has expired.

REP. DEUTSCH: Thank you.

REP. GREENWOOD: The chair would note the presence of the gentleman from Oklahoma, Mr. Largent, and would also note that this is his last day as a member of the United States House of Representatives. He has long been a valued, respected, and I would say admired, member of this committee. We value his contribution. I understand that the gentleman does not have time to inquire -- or he does?

REP. STEVE LARGENT (R-OK): Mr. Chairman, all I wanted to do was ask unanimous consent to submit my opening statement for the record.

REP. GREENWOOD: Without objection, the gentleman's opening statement will be part of the record, and the chair and the committee wishes him well in his future endeavors, and recognizes the gentleman from North Carolina, Mr. Burr, for 10 minutes to inquire.

REP. BURR: I thank the chair. We will miss Steve Largent.

Sherron, once you started to look for the problems, how long did it take you to identify the degree of problems that existed in some of these transactions?

MS. WATKINS: Actually not very long. I mean, I did know from the footnote that Enron had recognized $500 million of revenue in 2000 from the Raptor hedging transaction. Five hundred million is a significant number when you look at our net income for 2000.

As soon as I discovered that the losses at Raptor were backstopped by Enron, and that's the way the structure worked, I knew we had a very large problem.

REP. BURR: Could anybody charged with a review of what took place in these partnerships have missed it?

MS. WATKINS: I don't think so. And I was highly alarmed that this had occurred, and allowed to go on for so long.

REP. BURR: Did you feel like the letter that you had sent to Mr. Lay really did lay out a blueprint of what people should look at if they were outside concerns looking in at these transactions?

MS. WATKINS: Yes, I did.

REP. BURR: Let me go to the Vinson and Elkins -- I think this was a preliminary outline that they used that Mr. Dingell just put in the record. It was used to discuss -- to be a discussion graph with Mr. and Mr. Derrick. And specifically I want to go to item D, caveats, first one. And in that it says, "No second guessing of accounting treatment by AA." Interpret that for me, if you will.

MS. WATKINS: That they did not want Vinson and Elkins to make any or give any opinions regarding whether the accounting treatment was proper -- just assume that it was.

REP. BURR: Let me move to your meeting with Mr. Lay I think on August 22nd. You said you spent almost an hour. He seemed surprised by a lot of the things. But he made some commitments to you he'd look into it, didn't he?

MS. WATKINS: Yes, he did., REP. BURR: Having left that meeting, was there ever an exception that Mr. Lay made relative to these accounting discrepancies that you raised, that he wasn't going to look at those, but he might look at something else?

MS. WATKINS: No, I understood that he was going to try to get to the bottom of my concerns.

REP. BURR: Is there any way that what you shared with him could have been heard in a way that you could do an independent review of these transactions, leaving out second-guessing accounting treatment, and believe that you could fully understand what you had raised with him?

MS. WATKINS: No. The point is the accounting treatment. The point is the accounting disclosures in the footnotes to the financial statements.

REP. BURR: When you left that meeting with Ken Lay, did it ever cross your mind that they would turn to somebody who already had a relationship with Enron, be it Vinson and Elkins or Andersen, to actually do the review of their own work?

MS. WATKINS: I didn't think they would choose V&E. I was slightly -- well, more than slightly disappointed to find out that they subsequently did choose Vinson and Elkins to conduct the investigation.

REP. BURR: Did Mr. Lay stress with you that he would have a review done that was independent or that was thorough?

MS. WATKINS: He stressed that he would get to the bottom of it. He would look into my concerns. He didn't really go into detail as to what he was going to do to do that.

REP. BURR: I think that this discussion outlined for the meeting really lays out that no second guessing accounting treatment by Arthur Andersen, no detailed transaction analysis. And it seems that V&E was given very specific instructions: We need you to produce a report. We need you to stamp it okay -- but don't raise any questions about any of these things that have been brought to our attention. Is that pretty much what he did?

MS. WATKINS: Well, it appears from this V&E document that they had a very limited scope.

REP. BURR: Sherron, prior to the release of V&E's final report, they briefed your orally, I think on 10/16. Is that correct?

MS. WATKINS: They -- I think they had issued their report. I had not seen it. I didn't see it until this year. They briefed me after the earnings release that morning.

REP. BURR: And was that the first time that you knew that Vinson and Elkins had turned to Arthur Andersen to play a part in their review of the accounting discrepancies that you had raised that they had already signed off on?

MS. WATKINS: Yes. That was -- it was roughly a two-hour meeting where Joe Dilg and Max Hendrick (ph) went through how they had conducted their investigation. The reason they said that they chose to have Arthur Andersen relook at their own work was in the interest of time -- that the company wanted a speedy response, and no other accounting firm could get up to speed on these transactions very quickly. But they also told me other things that -- where they had limited their investigation, despite suggestions that I had given them on September 10th, when we had initially met for three hours at the beginning of the investigation.

REP. BURR: What was your reaction to that?

MS. WATKINS: I was highly alarmed. I did not think it was good advice for Mr. Lay. They told me that the conclusion was the accounting was appropriate when done. The cosmetics were bad, but it was appropriate. And I felt like that was -- especially since I knew that we had unwound these transactions and written off a billion two in shareholder equity that very morning. We happened to close that day at $33 a share, the same -- about the same price we had opened with that morning. But my concern was that that wasn't going to stick, that I gave it less than a 5 percent probability that this was going to go quietly. And I was highly concerned that not only had the Titanic hit the iceberg, but we were already tilting.

REP. BURR: Is it safe to say you didn't feel like the commitment that Mr. Lay had made to you to get to the bottom of it had successfully been accomplished?

MS. WATKINS: Yes, that's correct. I did not feel that.

REP. BURR: Sherron, one last question, if I can -- and it really deals with Enron management and their interaction between themselves and their audit firm. Are you aware at any point in that relationship as these partnerships were created, or as they fell, where Enron management in any way, shape or form used anything persuasive to encourage Andersen to turn their head or shut their eyes at the structure or the outcome of these partnerships?

MS. WATKINS: I don't think it was a turn-the-head kind of deal. Mr. Rogers, when I met with him August 17th, he did say, Well, we push our internal accountants quite hard. He mentioned we probably push our outside auditors pretty hard. So he seemed to indicate that there was probably a lot of pressure that Enron put on Andersen to accept the structures that Enron was developing around the Raptor vehicles.

REP. BURR: And given the timing of the V&E briefing with you, which was 10/16, which was close to that financial reporting period, can you share with me what V&E said about the 10/16 earnings release?

MS. WATKINS: About the earnings release itself?

REP. BURR: About that current earnings release -- what they said on 10/16. Did they address the earnings release?

MS. WATKINS: Well -- REP. BURR: I think it was a press statement that went out -- I think that was the announcement of the $577 million -- MS. WATKINS: It was -- we had a press release that we had unwound some of the LJM transactions, and taken these write-offs and reductions of shareholder equity in the third quarter. It was my opinion we should restate. And Mr. Dilg responded, “Do you really think Mr. Lay should ignore the advice of his counsel in this matter?”

REP. BURR: Given that you are going through a release from Enron for the $577 million adjustment, and a write-down of $1.2 billion in shareholder equity, how is that consistent with the report that V&E is briefing you on that there's no problem s?

MS. WATKINS: Well, it was -- it was very surprising to me. I said, “Well, if you told Mr. Lay that the accounting was appropriate, why did we unwind these deals? Why take a billion two write-down to equity if these deals were okay?” And they said -- their reply to me was that, “Well, that was a business decision I believe Mr. Lay felt like that these transactions were a distraction from core business, and he just decided to unwind them.”

REP. BURR: Sherron, thank you very much. I yield back.

REP. GREENWOOD: The chair thanks the gentleman and recognizes the gentleman from Michigan, Mr. Stupak, for 10 minutes.

REP. STUPAK: Thank you, Mr. Chairman. Ms. Watkins thanks again for coming. Let me pick up a little bit where Mr. Burr just left off. In this financial statement, there was pressure there to approve these special SPEs and these transactions, and you said a question about Enron putting pressure -- they said, Well, I am sure there's pressure on the internal auditors and external auditors.

But before a financial statement goes public, doesn't Arthur Andersen have at least a fiduciary responsibility to say this ain't right, it's not going in the financial statement, before it's put out to the public?

MS. WATKINS: Well, my understanding as a former accountant is that, you know, it's an odd situation. The accounting industry is paid by public -- by companies requesting their services. But your -- an accounting firm is supposed to keep their eye on who is relying on their opinions. Outside investors are relying on their opinions. That's who they are there to protect. And they make an opinion that these financial statements, including the footnotes, fairly represent the financial condition of the company.

REP. STUPAK: If these transactions are questionable, that may not fairly accurately represent the financial position of a company, and they really have the ultimate responsibility before it's released to the public to say yes or no to putting these out. Is that a fair statement?

MS. WATKINS: Yes, that's correct.

REP. STUPAK: How about Vinson and Elkins -- would they have the same kind of responsibility on the financial statements?

MS. WATKINS: I don't -- I don't think law firms necessarily have the same responsibility.

REP. STUPAK: Let me take you back a few years. Eight years ago -- you said for eight years you worked for Arthur Andersen.

MS. WATKINS: Yes.

REP. STUPAK: While you're at Arthur Andersen did you have any document retention policy back then?

MS. WATKINS: I am sure we did.

REP. STUPAK: Okay. Then let me ask the question this way: While at Arthur Andersen, how often did you see a memo or correspondence from the higher-ups saying, Just want to remind you all of our retention policy, i.e. destruction policy?

MS. WATKINS: I don't recall a lot of information about that. That was of course 14 or so years ago, and I am sure the policies have changed.

REP. STUPAK: But during your eight years, did you ever remember receiving or seeing one of these memos saying, Just want to remind you of our retention policy?

MS. WATKINS: I don't recall necessarily any specific memo on that.

REP. STUPAK: Okay. In your eight years at Arthur Andersen, for a while you were based in Houston. Did you work on the Enron account then?

MS. WATKINS: No, I did not work on the Enron account.

REP. STUPAK: Okay. You took Cliff Baxter's position as vice president under Mr. Fastow, correct?

MS. WATKINS: Well, no. When Mr. Baxter resigned, the whole corporate development function was assigned and put under Mr. Fastow. So I went to work directly for Mr. Fastow with -- helping him in that corporate development area.

REP. STUPAK: Did you work under Mr. Baxter before then?

MS. WATKINS: Indirectly, yes, I did.

REP. STUPAK: Do you have any reason, or do you know why he retired?

MS. WATKINS: It was to spend more time with his family.

REP. STUPAK: Wasn't forced out of the company or anything like that?

MS. WATKINS: No.

REP. STUPAK: Okay. Is it fair to say that these questionable transactions, the LJM and Raptor -- would they possibly be discovered by the next vice president who went in there?

MS. WATKINS: I think they were easy to discover. The facts weren't really hidden.

REP. STUPAK: Okay. In response to a question from Mr. Dingell, if I heard you correctly, you said Cliff Baxter complained to Mr. Skilling. What did he complain to Mr. Skilling about?

MS. WATKINS: My understanding is that Mr. Baxter complained that it was inappropriate for a company of our size, of our stature, to do transactions with the CFO's partnership. It was inappropriate, it didn't look good -- we should be doing transactions with the CFO's partnership.

REP. STUPAK: And the CFO at this time was Mr. Fastow?

MS. WATKINS: Mr. Fastow.

REP. STUPAK: In your opinion, why did Mr. Skilling then leave Enron on August 14th, 2001?

MS. WATKINS: It's my opinion that he could foresee these problems and he wanted to get away as far away from it as possible.

REP. STUPAK: Again some questions from Mr. Dingell -- he indicated when asked about Raptor and LJM the hedging, it was common knowledge how they were doing this, and that it really wouldn't stand up, because their assets weren't there. Common knowledge by who?

MS. WATKINS: The different business units that were hedging their assets with Raptor, as well as the global finance staff under Mr. Fastow.

REP. STUPAK: Mr. Dingell actually read a little bit from this one document which he placed on the record -- I believe it's on page 8. And it said, "Notwithstanding these bad cosmetics, Enron representatives uniformly stated that the Condor and Raptor vehicles were clever, useful vehicles that benefited Enron." So my question -- if they're pledged 100 percent with Enron stock, and then they couldn't meet the hedges as the stock started to fall, therefore they didn't benefit Enron, the employees or other shareholders of Enron, did they?

MS. WATKINS: No, they did not.

REP. STUPAK: I mean, clever, but not legal and not benefiting Enron?

MS. WATKINS: Yes, that's correct.

REP. STUPAK: Who did they benefit?

MS. WATKINS: They -- you could possibly say that they benefited Enron, because it allowed Enron to meet projected financial targets, which kept Enron's stock price inflated.

REP. STUPAK: Okay. So then that benefit then would go to Enron, but that benefit was then taken out of Enron, was it not?

MS. WATKINS: Well, it's -- the problem I have with it is it keeps the stock price inflated. And you had Mr. Skilling saying, “Our stock price was going to go to $120 per share.” So you have people buying that inflated stock price, thinking the stock price is going to go higher. Those are now new shareholders of Enron that certainly are not benefited by these transactions.

REP. STUPAK: Okay. Let me ask you this question then. And by no means do I mean anything negative by it. But we have had testimony throughout about how certain employees benefited handsomely financially from some of these transactions and being part of these SPEs. Were you ever offered an opportunity to join in one of these or to be part of one?

MS. WATKINS: No, I was not.

REP. STUPAK: So it's fair to say then you didn't invest in any of these SPEs, like some did, that put $5,800 in and they end up coming back with a million within two months or three months?

MS. WATKINS: No, I did not.

REP. STUPAK: Okay. You indicated -- let me to go this question. In number 8 here, it was in our book here, number 8 -- was the Raptor h edging strategy analysis risk and assessment control. And the chairman asked you some questions about it. In fact, on one page, Lessons learned -- the new Raptor structure transferred risk in the form of stock dilution. And in your handwriting, there it is, that's the smoking gun -- "You cannot do this" -- and that's your handwriting?

MS. WATKINS: Yes, it is.

REP. STUPAK: Who produced this document?

MS. WATKINS: Mr. Rick Buy's risk assessment and control group.

REP. STUPAK: Do you know when he would have produced it?

MS. WATKINS: I believe that this was produced during the first quarter of 2001 to address the fact that the Raptor structures were under water.

REP. STUPAK: So risk assessment under Mr. Buy produced this in the first quarter of 2001. Who was this distributed to?

MS. WATKINS: I am not completely certain of that. I believe it might have gone as high as the finance committee of the board. But from reading the Powers Report, they do not have appeared to have seen this analysis.

REP. STUPAK: So, okay -- and this was an internal document?

MS. WATKINS: It probably went certainly to Mr. Fastow -- and I would imagine that it also went to Mr. Skilling.

REP. STUPAK: How about Vinson and Elkins? Would they probably receive this?

MS. WATKINS: Probably not.

REP. STUPAK: Arthur Andersen?

MS. WATKINS: Probably not.

REP. STUPAK: Okay. But you thought probably the board of directors may have received this?

MS. WATKINS: I thought so at the time when I was meeting with Mr. Lay. But from reading the Powers Report it appears that they did not see this.

REP. STUPAK: So when you put in here your comments, or even the new Raptor structure transferred risk in the form of stock dilution, not knowing anything about this before this whole Enron thing, even I can pick it up now. Anyone who received this in the company should have realized there were serious, serious problem. And any accountant worth their weight in salt would certainly pick this up, would they not?

MS. WATKINS: Well, I mean, it would certainly seem so. But it was so well understood and so prevalent -- that is why I called Mr. Hecker at Andersen. I was about to meet with Mr. Lay, and I thought -- well, I called him, but since I had not been in accounting for over 10 years to say, you know, Could this ever be okay? And he said it didn't sound right. And his words to me were, Sherron, any accounting treatment must be clearly defensible if fully exposed. So if this is not clearly defensible when fully exposed, you are probably correct, and you should go see Mr. Lay.

REP. GREENWOOD: The time of the gentleman has expired. The chair thanks the gentleman. The chair recognizes the gentleman from Florida, Mr. Stearns, for 10 minutes to inquire.

REP. STEARNS: Thank you, Mr. Chairman. And, Sherron, let me thank you and also the staff for the prodigious amount of work they have here. Just to get on the record that it is more applicable to the committee that I chair dealing with FASB, I just wanted to ask you some questions.

There is ample evidence, as I noted, that Enron at a minimum used -- abused financial accounting standards to confuse its true financial condition. In your view, is Enron indicative of a failure to implement GAAP, generally accepted accounting principles, or a failure of the generally accepted accounting principles -- in other words, failure of the GAAP itself, or a failure to implement these principles?

MS. WATKINS: I think Enron had a failure to implement them correctly.

REP. STEARNS: So yo