Enron witness: Lay was duped

Ms Watkins' testimony capped two weeks of hearings

Enron employee and "whistle blower" Sherron Watkins has said the firm's former chief executive Kenneth Lay was 'duped'.

Speaking before a congressional committee, Ms Watkins said that she discovered a $700m (£489m) hole in Enron's finances last summer and urged former chief executive Kenneth Lay to find out who was responsible.

It is my humble opinion that Mr Lay did not understand the gravity of the situation

Sherron Watkins

But she maintained that Mr Lay, who holds an economics doctorate, did not understand the gravity of the situation, and that he was duped by his senior management Andrew Fastow and Jeffrey Skilling.

Ms Watkins' testimony jars significantly with what has already been heard during two intense weeks of congressional hearings.

Congressmen praised Ms Watkins for her courage

Her defence of Mr Lay contrasts with the blistering criticism he received from law makers.

And her interpretation of Mr Skilling's role flies in the face of his statement which stressed he was unaware that anything was wrong at Enron.

Enron was declared bankrupt last December after admitting it had inflated its profits, and has been shrouded in scandal ever since.

Scapegoat?

Ms Watkins said that Jeffrey Skilling - who was Enron's chief executive for a brief period in 2001 - left the firm because he could foresee the problem and wanted to get as far away as possible.

It is not the memo of a whistleblower, it's the memo of someone trying to initiate spin control and a scapegoating

Bruce Hiler
Mr Skilling's attorney

She described him as "an intense, hands-on manager" and a "highly intimidating and very smart individual".

Mr Skilling claimed not to know the details of Enron's problematic partnerships when he testified before the same committee last week.

Bruce Hiler, Mr Skilling's attorney, said Ms Watkins' testimony was not based on fact.

Ms Watkins testimony contradicts that of Mr Skilling

"Everything Ms Watkins said about my client is based on hearsay, rumour or her opinion," he said.

He also slammed the warning memo she sent to Mr Lay.

"Her memo is not the memo of a whistleblower, it's the memo of someone trying to initiate spin control and a scapegoating," said Mr Hiler.

Assigning blame

Ms Watkins also placed blame on Enron's auditor, Andersen - for signing off accounts - and on Vinson & Elkins, a law firm representing Enron.

"While she is clearly well intentioned, Ms Watkins is not in a positions to form judgements about Andersen," said a spokesman for the auditor, adding that she had not attended key meetings when Andersen discussed the partnerships with Enron executives.

Ms Watkins was highly critical of Mr Fastow

Her testimony left sacked chief financial officer Andrew Fastow in a bad light, when she revealed that he had tried to sack her and seize her computer when she sounding the warning bell.

Both Mr Fastow and Mr Lay invoked their right to remain silent before the congressional committees in order to avoid incriminating themselves.

She also laid blame at the door of Chief Accounting Officer Richard Causey and Chief Risk Officer Richard Buy - both of whom were sacked by Enron's acting chief Stephen Cooper shortly before the hearing began.

'Courageous'

Ahead of her opening speech, investigators described Ms Watkins as a "courageous bright spot in an otherwise sorry and outrageous saga".

"She sought valiantly - sadly in vain - to get the people in charge to face facts," said Jim Greenwood, chairman of the subcommittee, as he introduced the session.

Mr Lay was advised to come clean

Investigators questioned her closely to discover how, when and why her warnings were ignored by Enron's management.

In August, Ms Watkins sent an anonymous letter to Mr Lay in which she expressed her fears and worries about Enron's accounting practices.

"I am incredibly nervous that we will implode in a wave of accounting scandals," she wrote.

"The business world will consider the past successes as nothing but an elaborate accounting hoax" if Enron's deceptions were found out.

Sherron Watkins

Age 42

1981 graduate in accounting

1982-1993 Andersen employee

1993-2002
Enron employee

Husband - Richard
Daughter - Marion

She then continued her campaign through a series of memos, and advised Mr Lay about how he should handle his public relations.

"We need to come clean," she said to Mr Lay during a meeting on 30 October shortly before the firm came under investigation.

She urged Mr Lay to say he had wrongly trusted other executives and bad advice from Andersen and Vinson & Elkins.

Andersen also came under fire from a separate hearing, when former head of the Federal Reserve Paul Volcker said the auditors had been infected by greed during the financial boom.

The focus of the investigation now shifts to the Justice Department's criminal probe and the Securities and Exchange Commission's search into possible illegal activities.