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To Tell the Truth

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On Aug. 14 Sherron Watkins sat down at her computer and began typing a scathing—and now famous—memo to her boss. “I am incredibly nervous that we will implode in a wave of accounting scandals,” she wrote in the missive to Enron chairman Kenneth Lay. Worried about the wisdom of such blunt talk, the 42-year-old vice president for corporate development sought out colleagues and got mixed advice on whether she should send the note. But her mother did not waffle. “I told her,” says Shirley Klein Harrington, 67, “to stick with her convictions.”

Watkins did just that, and the seven-page memo has become a smoking gun in the unfolding investigation of alleged financial chicanery at Enron and its accounting firm, Arthur Andersen. On Dec. 2 the formerly high-flying Houston corporation became the largest company in U.S. history to file for bankruptcy. Watkins’s memo, made public on Jan. 14 by congressional leaders who found it buried in 40 boxes of subpoenaed documents, had proven prescient. Now, more than a dozen federal agencies and Capitol Hill committees are probing the mushrooming morass—the latest news being that Enron and Andersen employees continued to shred documents even after it was clear that Congress was opening what could become a criminal investigation.

More important to hundreds of employees who saw their retirement packages collapse with the failing stock price, Watkins’s memo was also key evidence that Lay and other Enron execs knew about the company’s precarious finances well before they alerted the staff or the public. “She’s one of the few ethical bright spots,” says Barbara Shook, a Houston energy-industry analyst, of Watkins. Adds Watkins’s sister, homemaker Julie Reagan, 40: “She couldn’t believe what people were getting away with, and she didn’t think it was right. I’m so proud of her I’m about to pop.”

Watkins, who lives in Houston with husband Rick, 51, an executive for a Canadian oil and gas firm, and their daughter Marion, 2, doesn’t regret sending the memo. “The die was already cast,” she says through her lawyer, Philip Hilder. “My take on it changed nothing.” Life at Enron, where she is still employed, has been “extremely painful, as it is for everybody, with the company under fire,” she adds. Watkins has been subpoenaed to testify before the Securities and Exchange Commission, and more subpoenas are likely.

In and out of the office, Watkins has left a variety of impressions—some good and some bad, but all forceful. Friends say they value her sometimes rough honesty: She once told her sister Julie that a picture frame Julie had given her was “the tackiest thing I’ve ever seen.” Coworkers see her as hard-driving, with one Enron employee likening her to “a bull in a china shop.” Her former secretary Wilma Williams, 60, disagrees. “Sherron wasn’t abrasive; she just expected people to do their job,” Williams recalls.

Her frankness and salty language even had some coworkers buzzing that she was a New Yorker. In fact, Watkins was raised in the Houston suburb of Tomball, Texas. (Singer Lyle Lovett is her second cousin.) Her mother, a retired accounting teacher divorced from her daughters’ attorney father, Dan C. Smith, 67, encouraged Sherron to go into accounting. “It’s an area in which women can be accepted on an equal basis,” Harrington says. Watkins earned bachelor’s and master’s degrees at the University of Texas. “She was brilliant,” says friend Anne Benolken, 42. “You know the way girls in college often act more stupid than they are or try not to make waves? Not Sherron, she’d always stir the pot.”

Watkins began her career as an auditor for Arthur Andersen. She then moved to a firm in New York City, MG Trade Finance Group, before returning to Houston to work for up-and-coming energy wholesaler Enron in 1993. In 1997 she wed Rick, whom she had met at Houston’s First Presbyterian Church.

By last summer Watkins had come to suspect that Enron, which FORTUNE ranked as the seventh-largest company in the U.S. last year, was a house of cards. When Enron CEO Jeffrey Skilling resigned in August, chairman Lay invited employees to forward any concerns to him. Watkins sent him the first page of her memo detailing her uneasiness about “funny” accounting to hide company losses. “Has Enron become a risky place to work?” she asked.

On Aug. 22 Watkins met with Lay, who told the company’s law firm to look into the matter. The firm reported in October that the practices might make the company look bad but did not appear to be illegal. But Watkins’s fears rapidly came to pass. Since December, Enron has fired more than 4,000 employees, and thousands of others have lost much of their life savings. Watkins was fortunate in having sold some stock in 1999 to buy her house.

Watkins doesn’t relish the prospect of playing a pivotal and highly visible role in the ongoing investigation. “The only good thing that might come out of all this,” she says, “is there may be certain reforms so that there won’t be another Enron.”

Samantha Miller

Gabrielle Cosgriff in Houston