Sherron Watkins' Testimony at House Hearing on Enron
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Text of Sherron Watkins' Testimony at House Hearing on Enron
http://www.apfn.org/enron/watkins2.htm
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.
FULL REPORT:
http://www.apfn.org/enron/watkins2.htm
[SNIP]
MS. WATKINS: It should work. In my opinion, I think somehow in this country our financial accounting system has morphed into the tax code. And, you know, in the tax accounting, if you follow the codes, whatever result you get, you are justified in using that treatment. In financial accounting, a number of my accounting friends have said if you follow the rules, even if you get squirrelly results, you know, you have a leg to stand on. And I am surprised that the financial accounting system has morphed into that, because you should still fairly represent your financial condition.
REP. STEARNS: This is to me a very important point. You know, what you are saying is that Enron's problem was a flawed corporate strategy, and simple, old-fashioned bad assets, and that the accounting problems did not precipitate it's collapse -- is that what you're saying?
MS. WATKINS: No, I do think the accounting problems precipitated the collapse, because when the investing community was uncertain about our numbers, when they were driving the stock price down, almost everyone was aware that if the stock price dropped too low, if our investment grade rating fell away, there would be additional debt coming due. And we did have an old-fashioned run on the bank. The –
REP. STEARNS: So -- but you are saying that the GAAP worked, and it was -- GAAP was not the problem. The accountants -- it was more the business strategy and how they used the accounting principles, how they implemented it?
MS. WATKINS: They did not implement them correctly.
REP. STEARNS: Okay. So if you went to the American Institute of Accountants and talked to them, you wouldn't recommend that they change anything with Raptor partnerships or LJM 1 or 2, or anything -- you'd say that's not the problem?
MS. WATKINS: Well, I don't think Enron reported the accounting -- the accounting of these transactions I think was inappropriate. We should not have been able to –
REP. STEARNS: But that was because of the people. That was Mr. Fastow and his people.
MS. WATKINS: Yes.
REP. STEARNS: But it wasn't Arthur Andersen?
MS. WATKINS: Well, Andersen also signed off on the way we were implementing these accounting -- REP. STEARNS: But if Arthur Andersen was told something and it was not the truth, they might accept it. Is it possible that Arthur Andersen has some culpability here because they signed off on it?
MS. WATKINS: I think so, because they are charged with auditing the results, and a sensitive related-party transaction should get a lot of scrutiny.
REP. STEARNS: So, Arthur Andersen, in your opinion, signed off on something they shouldn't have.
MS. WATKINS: yes.
REP. STEARNS: Do you think they knew what they were signing off on?
MS. WATKINS: They sure should have known what they were signing off on.
[SNIP]
By Jennifer Frey
THE WASHINGTON POST
AMERICAN HERO!
* HOUSTON, Jan. 25 — When she woke up on Monday morning, Jan. 14, Sherron Watkins was just one of the legions of high-powered executive moms, the kind of woman who drove an SUV, who liked to take her 2-1/2-year-old daughter to preschool on the way to the office, who caught up with her sister by cell phone during her morning commute. At age 42, Watkins had climbed to the rank of vice president at Enron, she owned a lovely home in an upper-class Houston neighborhood, and she finally had the family she’d so long desired.
http://www.apfn.org/enron/Sherron_watkins.htm
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News24, South Africa - 20 hours ago
... US secretary of state Colin Powell was briefly ... was dining with former President Bill Clinton and others ... Powell's secretary, Peggy Cifrino, did not immediately ...
Powell Falls Ill While Dining With Clinton KCCI.com
BREAKING NEWS: Powell says he's fine following hospital visit Aspen Daily News
all 169 related »
Text of Sherron Watkins' Testimony at House Hearing on Enron
http://www.apfn.org/enron/watkins2.htm
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.
FULL REPORT:
http://www.apfn.org/enron/watkins2.htm
[SNIP]
MS. WATKINS: It should work. In my opinion, I think somehow in this country our financial accounting system has morphed into the tax code. And, you know, in the tax accounting, if you follow the codes, whatever result you get, you are justified in using that treatment. In financial accounting, a number of my accounting friends have said if you follow the rules, even if you get squirrelly results, you know, you have a leg to stand on. And I am surprised that the financial accounting system has morphed into that, because you should still fairly represent your financial condition.
REP. STEARNS: This is to me a very important point. You know, what you are saying is that Enron's problem was a flawed corporate strategy, and simple, old-fashioned bad assets, and that the accounting problems did not precipitate it's collapse -- is that what you're saying?
MS. WATKINS: No, I do think the accounting problems precipitated the collapse, because when the investing community was uncertain about our numbers, when they were driving the stock price down, almost everyone was aware that if the stock price dropped too low, if our investment grade rating fell away, there would be additional debt coming due. And we did have an old-fashioned run on the bank. The –
REP. STEARNS: So -- but you are saying that the GAAP worked, and it was -- GAAP was not the problem. The accountants -- it was more the business strategy and how they used the accounting principles, how they implemented it?
MS. WATKINS: They did not implement them correctly.
REP. STEARNS: Okay. So if you went to the American Institute of Accountants and talked to them, you wouldn't recommend that they change anything with Raptor partnerships or LJM 1 or 2, or anything -- you'd say that's not the problem?
MS. WATKINS: Well, I don't think Enron reported the accounting -- the accounting of these transactions I think was inappropriate. We should not have been able to –
REP. STEARNS: But that was because of the people. That was Mr. Fastow and his people.
MS. WATKINS: Yes.
REP. STEARNS: But it wasn't Arthur Andersen?
MS. WATKINS: Well, Andersen also signed off on the way we were implementing these accounting -- REP. STEARNS: But if Arthur Andersen was told something and it was not the truth, they might accept it. Is it possible that Arthur Andersen has some culpability here because they signed off on it?
MS. WATKINS: I think so, because they are charged with auditing the results, and a sensitive related-party transaction should get a lot of scrutiny.
REP. STEARNS: So, Arthur Andersen, in your opinion, signed off on something they shouldn't have.
MS. WATKINS: yes.
REP. STEARNS: Do you think they knew what they were signing off on?
MS. WATKINS: They sure should have known what they were signing off on.
[SNIP]
By Jennifer Frey
THE WASHINGTON POST
AMERICAN HERO!
* HOUSTON, Jan. 25 — When she woke up on Monday morning, Jan. 14, Sherron Watkins was just one of the legions of high-powered executive moms, the kind of woman who drove an SUV, who liked to take her 2-1/2-year-old daughter to preschool on the way to the office, who caught up with her sister by cell phone during her morning commute. At age 42, Watkins had climbed to the rank of vice president at Enron, she owned a lovely home in an upper-class Houston neighborhood, and she finally had the family she’d so long desired.
http://www.apfn.org/enron/Sherron_watkins.htm
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