YT YouTube2Text

YouTube2Text → Transcripts → Sherron Watkins, former vice president, Enron Corporation

Sherron Watkins, former vice president, Enron Corporation — Transcript

by IT Academic Technologies · 11,860 words · 1,710 segments · language en · Watch on YouTube

Open in transcriber Summarize with AI Download SRT/VTT

Full transcript

0:02good evening it's wonderful to have such
0:04a great crowd tonight I'm Doug shackford
0:06I'm the dean of UNCC Keenan Flagler and
0:09welcome to tonight's lecture this is our
0:12second event in the dean speaker series
0:14for this Academic Year the dean speaker
0:17series was created to bring to campus
0:19outstanding Scholars and leaders to
0:21share thoughts and insights within UNCC
0:24Keenan Flagler the university and the
0:26community at large the series is
0:28sponsored by a gift from from the Archie
0:30K Davis
0:31Foundation at the conclusion of this
0:34evening's lecture Jan Rady associate
0:36dean of the master of accounting program
0:39associate professor and ey scholar in
0:41accounting will give will deliver a vote
0:43of thanks to our speaker on behalf of
0:45the faculty staff and
0:47students also I would like to mention
0:50two other speakers we will be hosting in
0:52coming months on February 2nd former
0:56Maine Senator Olympia snow will deliver
0:58this year's Weatherspoon lecture
1:00two weeks later we will welcome Tim Belk
1:04chairman and chief executive officer of
1:06Bel and a 1981 MBA graduate of the
1:10business school Tim will be our final
1:12Dean speaker for this Academic Year you
1:15can look for more details and
1:17registration information for both of
1:19those events to come your way in the
1:21coming
1:22weeks now I'm happy to to welcome to UNC
1:26Keenan Flagler Sharon
1:28Watkins Sharon is the former vice
1:30president of Enron
1:32Corporation she alerted then CEO Ken Lay
1:36in August of 2001 to accounting
1:38irregularities within the company she
1:41testified before congressional
1:42committees from the House and Senate
1:44investigating enron's
1:46demise she has been loaded for her
1:48courageous actions and Time magazine
1:51named her as one of their three 2002
1:55persons of the year in recognition of
1:58her outstanding demonstration of Ethics
2:00in the workplace she has received
2:02numerous honors including the National
2:05Academy of Management's distinguished
2:07executive award the women's economic
2:10Roundtable presented her with the rth
2:13award for educating the public about
2:15business and finance she is the
2:17co-author of power failure the inside
2:20story of the collapse of Enron prior to
2:23joining Enron she worked as portfolio
2:25manager of
2:26mg trade Finance Corporation and for
2:30eight years at Arthur Anderson in New
2:32York and Houston Sharon is a certified
2:35public accountant holds a masters in
2:37professional accounting as well as a
2:39bachelor in Accounting in business from
2:41the University of Texas at Austin the
2:43topic of her speech this evening is
2:46lessons from the collapse of Enron and
2:48the complexity of whistleblowing please
2:51join me in giving a warm Carolina
2:53Welcome to Sharon Watkins
3:05thank you thank you very much I really
3:07like this Auditorium too it's um you
3:10know it feels nice and close in I can
3:12see y'all um I'm going to probably
3:14present some in raw materials for about
3:1635 minutes but I'm hoping that we have
3:18some some um Lively question and answer
3:21time you know it's
3:232015 Enron
3:26collapsed in
3:282001 um you know I I just changed my
3:33description of whistleblowing to
3:35complexity of whistleblowing versus the
3:38toxicity of
3:39whistleblowing and there's now really a
3:41bright spot um in in this country with
3:45what's happened with some protections
3:47for whistleblowing so I am going to go
3:49into sort of what happened at Enron the
3:51Lessons
3:52Learned um but I'm going to spend some
3:55time on on where the Whistleblower
3:56protections have been in this country
3:58and and the new develop ments because I
4:00think it is
4:01helpful um you know people enron's now
4:04just the byword for corporate Scandal
4:07but really you know the people that got
4:10caught up in the problems at Enron you
4:12know did not most of them did not mean
4:15to commit Securities fraud violations
4:18they didn't mean to cross that line so
4:20to me it's important to speak to college
4:23students because I I want to put the
4:25warnings out there you know you do have
4:27to pay attention to to the small steps
4:30in the wrong direction because you could
4:32find yourself in a situation similar to
4:35Enron we were called the most Innovative
4:38company in America for seven years in a
4:40row by Fortune Magazine we that's the
4:43our two towers in Houston and then one
4:46of our seven trading floors we had
4:48started life as the merger of two very
4:51large regulated natural gas pipeline
4:53companies but we had morphed into what
4:56people call the Wall Street of energy
4:58trading we hand to about 25% of the
5:00country's energy transactions both
5:02financially and physically and our
5:07business Executives like Jeff Skilling
5:09like to brag that we were you know what
5:11was making up our bottomline profit
5:13today was businesses we weren't in 20
5:16years ago and we're going to get even
5:18faster at Innovation and in 10 years you
5:21know most of our bottom line income will
5:22be coming from even new businesses that
5:25we haven't been in um the problem with
5:27sort of innovation Innovation is the
5:30Dark Side of pushing your employees that
5:31much you know is is fraud we got pushed
5:34to the point of Crossing Lines I put the
5:37stock price chart up here mainly to to
5:41point
5:41out you know when it grows that much and
5:44you have a stock split you kind of
5:46focused towards the end but I began
5:49working at Enron in 93 where you see our
5:51stock prices at $10 three years later in
5:5496 we're at 20 three years later at 99
5:57we're hovering at 40 and then we go up
5:59to 9 90 well Enron compensated us with
6:02Employee Stock ownership plans stock
6:05grants and stock options when you
6:07contributed to your 401k plan the
6:10company's match was in Enron stock so
6:13you might be a person that always
6:16follows the guidelines you don't put all
6:18your eggs in one basket I was sort of
6:20like that my 401k contribution was
6:23always put in like a Vanguard S&P Index
6:26Fund I did not put my contribution in
6:28Enron stock
6:30but the company matched by putting your
6:33by matching it within on
6:35stock it builds Goodwill when the stock
6:37price is going up like this you're able
6:39to sell stock options and you make more
6:42money than you ever thought you would
6:44you open up your retirement quarterly
6:46statement and it looks you know
6:48healthier and bigger than than you you
6:51know thought it was going to be it it
6:52makes you feel good about the company um
6:56s problems usually happen in successful
6:59times
7:00I in classes sometimes I'll use the
7:03Columbia accident investigation report
7:06as sort of a starting point to what
7:07happened at Nasa with losing two
7:10shuttles but particularly the
7:12Colombia um foam strike they had had
7:16foam fall off the rocket and hit the
7:18shuttle in the past and it had not
7:21caused problems there was an engineer
7:23very concerned that this foam strike
7:25that happened in 2003 was frozen larger
7:30denser hit a vulnerable part of the left
7:32wing but what prevented the whole
7:35organization at Nasa from doing further
7:37work they they had talked about turning
7:39military satellites from looking at the
7:41Earth to looking at the at at the Space
7:44Shuttle as it went
7:45overhead but foam strikes hadn't caused
7:49problems in the past and someone said I
7:50don't want to be a chicken little on
7:52this and incur costs for no good reason
7:54and you know we lost a shuttle as a
7:57result so you've got to be careful that
7:59your prior success makes you ignore
8:02warning signs you know I live in Houston
8:05Texas we're you know our primary driver
8:08is oil and gas industry the BP oil spill
8:12was was quite a big deal in Houston the
8:14people working on it were based in in
8:16Houston um Drilling in the Gulf got shut
8:20down until it was understood what had
8:21happened but if you really look at the
8:23Articles they had high pressure readings
8:26they had alarm Bells going off and what
8:28your pro protocol is is to is to make is
8:32to go ahead and launch your blowout
8:35preventer and that's heavy equipment
8:37that chops off the well it kills it
8:41you're going to just flush you know
8:44Millions hundreds of millions of dollars
8:46of investment down the tubes but all of
8:48those warning Bells mean that's what you
8:50need to do to prevent an oil spill well
8:54the litigation around BP they had folks
8:57operating going well that alarm Bell is
9:00going off that hasn't ever happened
9:02before um they were hesitant to do what
9:04they were supposed to do because
9:07disaster had never
9:09happened um part of my discussions at
9:12leadership conferences you you do have
9:14to plan for disaster and be disciplined
9:17to follow that you know be careful of
9:19success Enron had just had so much
9:20success the board of directors said that
9:24they kind of began to lose their
9:26skepticism because the market kept
9:28rewarding our Behavior we must be doing
9:30something right um here is a listing of
9:33the executives that sold over a billion
9:35dollars of Enron stock in the last two
9:38years of the company's
9:40existence now the Whole Decade of
9:442000s has been sort of a decade of
9:47corporate Scandal but when Enron first
9:49collapsed this was kind of new news that
9:52a company that had had a market cap of
9:54$60 billion at the beginning of 2001 was
9:58now declaring bankruptcy appearing that
10:02shareholders were going to get nothing
10:03and they didn't they didn't get anything
10:06um yet the people who had been running
10:08the company were not going to be poor
10:11they weren't going to be selling their
10:12homes they weren't going to be selling
10:14their cars they had sold you know lots
10:17of stock options in the runup to enron's
10:20collapse and this was just repeated with
10:23Worldcom with Adelphia with health south
10:27and then in 2008 with Leman brothers and
10:30meil Lynch and City Bank and Chase but
10:33back in 2001 this was this angered a lot
10:36of people we had over two dozen
10:38shareholder lawsuits 13 Congressional
10:40investigations there was a special Enron
10:43task force that was um pulled from
10:46around the country SEC folks Department
10:48of Justice and FBI to investigate civil
10:51and criminal violations from enron's
10:54Executives the California folks started
10:57looking into the trading aspects in the
10:59in their state and then finally enron's
11:03board kind of woke up to what's going on
11:06you know what why have we um why is
11:10there so much negative press all of a
11:11sudden about Enron why is our stock
11:13price declining and they hired Bill
11:16Powers who was Dean of the UT law school
11:19and hired
11:20um outside lawyers and accountants deot
11:24and Tu and Wilmer Cutler and Pickering
11:27to investigate really my concerns
11:29now I have a whole slide about the
11:31powers report because it was really a
11:34godsend to me I had been at Enron for
11:37eight years you know you you actually
11:39have 20 years of
11:40corporate um work history Arthur
11:43Anderson for eight years Mattel gazelle
11:45shaft and Enron and everyone knows
11:47Arthur Anderson is no more because of
11:49their flawed audits at Enron Enron
11:52obviously is no more but mg trade
11:54Finance Mattel gazelle shaft was a 125y
11:57old German company that was brought down
11:59by a $1.3 billion oil trading Scandal
12:02that happened in New York City in
12:041993 deuts bank took them over they're
12:06no more so I was meeting with students
12:09earlier I'm I'm a CPA I'm kind of risk
12:12adverse I never went to work for a
12:13startup
12:15company um I'm on my own so maybe that's
12:18the the better thing but you know I
12:20never imagined that these big companies
12:22I went to work for you know would be no
12:25more and not because someone bought them
12:27but they blew up in disc I mean there's
12:30there's no reference checking on on my
12:32uh resume there's no one to call no one
12:36to absorb those companies um it's um but
12:40it's kind of sad um it it it does make
12:44me kind of cautionary I am here to talk
12:46about what the warning signs are but I
12:50people ask me why did you go to
12:51kinlay um there's a book by Adam Grant
12:54and I guess he used to be a professor
12:56here he wrote give and take he has a
12:58chapter on kin
12:59that kinlay is actually a taker
13:01disguised as a giver and I I read his
13:04chapter and I was just really amazed at
13:07the insights that he has and I think
13:09they really are spoton I thought kinlay
13:12was a different person Jeff Skilling had
13:15been um at the company for 10 years I
13:18was initially hired under in his
13:20division in 97 he made Chief Operating
13:24Officer in the year 2001 in January he
13:26made CEO he'd been striving for that
13:29spot and he abruptly quits mid August
13:332001 eight months into the job I had
13:37stumbled across this fraud two weeks
13:39prior to Skilling
13:41quitting um I I met with some students
13:43earlier this afternoon and they ask you
13:45know did you sort of see this coming
13:47over time how did you discover this it
13:50was your typical fraud detection where a
13:54employee switches positions you know and
13:57says hey what's it elephant doing in the
14:00room you know you you find this fraud um
14:04I don't want to go into too much of the
14:06specifics but I was put in charge of a
14:09list of assets there were about 12
14:11Investments that were hedged with
14:13entities called the Raptors there were
14:15four Raptors and there was just a loss
14:17on the spreadsheet that made no sense to
14:19me and when I kept asking and asking
14:21about these structures I did not get
14:24good answers I I was discovered that the
14:26Raptors had no outside investors no
14:31third-party um money was at risk they
14:34had an ability through some puts and
14:36calls to get their hands on enron's
14:38stock so these Raptors owed Enron about
14:40$700 million when they were going to pay
14:43Enron they were going to stick their
14:45money their hand in enron's pocket grab
14:48out some stock sell it in the
14:49marketplace and pay Enron back well you
14:52know I hadn't practiced Accounting in 10
14:55years but you know it just doesn't get
14:56that creative that you can just come up
14:59with some complicated structures and and
15:01do business with yourself but in meeting
15:04with Kim L I felt like I had credibility
15:09because I know why Jeff skilling's
15:11quitting you know I I I gave him memos I
15:14gave him an Excel spreadsheet a
15:16PowerPoint document but you know I was
15:19claiming that Arthur Anderson had had
15:21failed in their audit and the lawyers
15:24had failed in their work but why do you
15:26have a CEO quitting for no good reason
15:28well these things are going to blow up
15:29in two years and he wanted to be far
15:31removed from it um I use the Titanic
15:35example I'm just the crew member saying
15:36we've hit an iceberg you know send your
15:38experts down to the bottom of the ship I
15:40think you'll see that so much water's
15:41pouring in we're going to sink well it
15:44never dawned on me that he would not go
15:47down to the bottom of the ship they
15:49ended up doing a whitewash investigation
15:51using our normal lawyers that we use to
15:54even structure these deals and you know
15:57he basically just said said look at our
16:00plans make sure icebergs don't matter to
16:02us um I didn't know all this you know
16:05they did pretend they were doing a
16:07thorough investigation with me I didn't
16:09know until I testified in front of
16:11Congress how limited and scope that it
16:13was but I just didn't see people
16:16sounding the alarm Bells I didn't see
16:18that crisis management team being formed
16:21I didn't see reality being you know
16:25accepted and then 911 happened um it it
16:29was all a very Bleak Bleak time I did
16:31get the typical whistleblower treatment
16:33where I was moved from the executive
16:35floor down to the 16th floor not given
16:37any real work or or offered a position
16:40that was directly under the chief
16:41accounting officer that I was accused of
16:43being part of the you know fraud problem
16:46it was just a bizarre time because I I
16:49really felt a sense of relief that when
16:51I spoke truth to power when I kind of
16:53met with kinlay I'd had some sleepless
16:55nights met with him um gave him all this
16:59information I walked away with a sense
17:01of relief you that I'd sort of done my
17:03duty you know given him this information
17:06that he needs to know and then to see
17:09people ignoring truth not doing the
17:12right thing then 911 happening and then
17:15mid
17:16October Enron writes off the structures
17:19I was talking about but in a way that
17:22you can't do as a non they called it a
17:25non-recurring non-cash unwind of a pre
17:28previously disclosed related party
17:31transaction yeah yeah that doesn't
17:33really make a lot of sense to people um
17:36and then there was lots and lots of
17:38speculation our stock price started to
17:40decline The Wall Street Journal hit us
17:43with three expose articles I think they
17:45had a whistleblower that was giving them
17:47information but they were too chicken to
17:49write articles about it until Enron
17:51drove themselves into a ditch but then
17:54but the Wall Street Journal doing those
17:56three p three days in a row of articles
17:59the SEC started an informal
18:00investigation finally the board wakes up
18:03and starts to investigate accounting
18:06concerns but all throughout the fall I
18:09had an in-house lawyer telling me I was
18:11all wet I shouldn't go out on a limb
18:14with what I was saying um I would get
18:17nasty comments an in-house lawyer said
18:20well I don't think you need to look
18:21under your car for a bomb or anything
18:23and I thought to myself I would have
18:24never thought that but now that you've
18:26brought that into the room you know that
18:28that makes me a little nervous um so you
18:32I was really feeling kind of all alone
18:35with my
18:36concerns
18:38so Enron actually declared bankruptcy in
18:41early December they laid off 5,000
18:43people three weeks before Christmas you
18:46know with with nothing no severance no
18:48anything I thought I was actually
18:49walking out the door too but an in-house
18:51lawyer kind of saved my job because he
18:53was having me meet with the law firms
18:55that were defending Enron the executives
18:57and the board and then in January a
19:00congressional staffer found my memos in
19:02a box of documents released them to the
19:05Press they did some direct subpoenas
19:07around my memos and there was sort of
19:09this sense that aha we knew there was
19:12more rot because the executives at Enron
19:14were kind of circling the wagons and
19:17pointing to our CFO and saying wow look
19:21he lied to us he lied to you you know
19:23we're victims too but that just wasn't
19:25ringing true with people it did seem
19:27like the rot was more pervasive so this
19:30report came out early February and they
19:34said everything I had said was true and
19:36even more they talked about this
19:39unprecedented conflict of interest that
19:40the CFO had that the Raptor transactions
19:43had little economic substance Enron was
19:45just passing one risk from one pocket to
19:47another the disclosures weren't adequate
19:50and they blamed everybody absolutely
19:52everybody they said the blame rests with
19:55in-house lawyers in-house accounting and
19:57business executives outside lawyers
20:00Anderson and the board of
20:02directors it was such a sigh of relief
20:04for me because finally there was you
20:07know a group of experts that was saying
20:09what what I was saying it was it was
20:11quite a relief I say this now because I
20:13do think the
20:16new legal support for The Whistleblower
20:19that has come about because of Dodd
20:20Frank will provide this kind of support
20:23for whistleblowers now and it was quite
20:25an emotional relief for me so what
20:29happened at Enron I just was asked to go
20:32to Tokyo in early October the
20:34association of certified fraud examiners
20:36had hired Andy Fastow to speak he's now
20:39going around the country and around the
20:40globe talking about rules versus
20:43principles he holds up his prison card
20:45and his CFO of the Year award and says
20:48he got both for doing the same thing and
20:51he says it in a way that people are like
20:53wow you know how weird but they believe
20:55him well he got his prison card because
20:57the Department of Justice knew all the
20:58details about what he was doing he got
21:01the CFO award just like any like the
21:03reason people invested in in the stock
21:05market he was I mean Enron stock he was
21:07manipulating the financial statements
21:09they did not know all the
21:11details um and he goes
21:14into am am the ambiguity in the rules a
21:18focus on the rules but Andy is part of
21:21this phase four he potentially looked he
21:25I mean he purposely looked for ambiguity
21:28looked for ways of twisting the rules to
21:30meet his goals and then dared Arthur
21:32Anderson to prove where he had
21:34technically violated a rule so Enron
21:36really moved into this fourth stage
21:40of totally abandoning accounting
21:42principles or any kind of financial
21:44reporting principles and used used the
21:48um rules to meet their goals this is one
21:51structure I'm only putting it up there
21:53just to show you the complexity this is4
21:56billion debt deal and the little green
21:58shaded areas are the only non Enron
22:03entities this is very complex for one
22:06structure and Enron did this on purpose
22:10if you kept asking questions they would
22:14um really have this intimidating tone to
22:18their voice and say you know look we've
22:20hired the sharpest accountants and the
22:22sharpest Finance Minds in the country
22:25you know the implication was you're
22:26really going to keep asking questions
22:28and and show how stupid you are you know
22:30so so smart people just kind of got
22:32intimidated into not asking questions um
22:36nobody looks at the financial statements
22:37when you're busy working at a company I
22:39didn't look at the financial statements
22:40if I had I I would have seen this
22:43Bethany mlan at Fortune Magazine saw
22:45this I don't want to bore you with
22:47numbers it's just going to be a quick
22:48look see but you see our quarterly net
22:50income in 2000 is positive every quarter
22:54with a yearly number of right under a
22:56billion dollars $979 our cash flow from
22:59operations should be positive you take
23:01your net income and add back
23:03depreciation instead it's a huge
23:05negative number in the first quarter
23:06negative in the second you know slightly
23:10positive in the third and then $4.8
23:13billion dollar in the fourth quarter
23:15this smacks of fourth quarter
23:18engineering to make the annual numbers
23:20look good and this is what Bethany mlan
23:23was looking at and she wrote an article
23:25in Fortune magazine called as Enron
23:27overpriced in the the spring of 2001
23:30looking at this this stuff well she was
23:33basically saying the emperor might not
23:35have clothes but people don't like to
23:38take pot shots at the emperor it just
23:40didn't get any legs it didn't gain any
23:42traction and Enron just kept going they
23:45flew up they pressured Fortune Magazine
23:47they met with Bethany
23:49mlan um they really acted like she was
23:52an idiot and didn't know what she was
23:53talking
23:54about um but the numbers were there it's
23:57just hard to it's hard to bring down the
24:00emperor so what was wrong diffusion of
24:03responsibility I'm not an accountant
24:04that intimidating kind of um way that
24:07Skilling just acted like you didn't get
24:09it if you were asking good questions we
24:12also had a pretty Fierce Rank and yank
24:15review system it was what have you done
24:16for Enron lately so smart people just
24:19stopped asking questions because they
24:20had to get busy closing deals you know
24:23they had to move on to the next project
24:25um we also outsourced our Control
24:29Department we had outsourced internal
24:31audit and we pretty much emasculated our
24:33risk management
24:35business um that's just hugely
24:37problematic the students today were
24:38asking you know what was Enron like to
24:39work for it was very entrepreneurial it
24:42was very fast-paced it was very fun and
24:44they did great boond doggles I went on
24:47two ski trips a year um this was with
24:50the faculty that I was talking about I
24:52didn't tell the students this but um we
24:54had we'd rent homes in Beaver Creek
24:56you'd bring customers up
24:59you not only had a chef that fixed you
25:00whatever you wanted for breakfast he
25:02would be there for dinner but you could
25:04also go out to dinner if you wanted we
25:06also had massas when you came off the
25:07slope so you could get a massage but
25:10we'd also have ski instructors that
25:12would show up at the house you know as
25:13we were heading to the slopes and say
25:15okay you know who's blue who's black you
25:18know Steve is taking the the black
25:20skiers I'm taking the blue and you got
25:22to cut the lines you know when you're
25:24with an instructor you you go to a
25:26separate line you know you're skiing all
25:28over the mountain you know with
25:29instructors all day long um I did that
25:32twice a year for my eight well my last
25:35year at Inon I just went on one ski trip
25:38um but you know that kind of thing it
25:41does incentivize you to just stop asking
25:44questions you're being treated so well
25:46and that was part of the board's problem
25:48enron's board of directors was paid
25:50$350,000 a director you know flown in on
25:53the corporate Jets wind and DED you know
25:56so you get 350 Grand to maybe at best go
25:59to eight meetings in a year you know at
26:02worst um the board members were wealthy
26:05people but you can kind of leave your
26:06own money alone and just live off that
26:09um it made the average of the time for
26:11enron's peer group was like
26:14130,000 it made the board members feel
26:16like enron's management really could
26:18spin straw into gold um there was a
26:22whole report from the Senate on them and
26:24they condemned the board for allowing
26:26Enron to enter into these risk
26:29um highly structured Finance deals the
26:31conflicts of interests the board had to
26:33wave the code of conduct twice to let
26:35Andy form this investment partnership
26:37that that was at the heart of enron's
26:39fraud um it's still it's just
26:41mind-numbing that they they allowed
26:43this
26:45so what was it you know that caused
26:49enron's problems I am writing a second
26:51book on my faith Journey but I've been
26:53saying that now for five years and I
26:55need to get to it but I'm using both
26:56these quotes and Alexander suon said we
27:00do not Heir because truth is difficult
27:01to see it's visible at a glance we a
27:04because this is more
27:06comfortable well I would have just kind
27:09of gone huh what because I'm kind of a
27:13black and white person you know truth is
27:15truth what do you mean it's more
27:17comfortable um to really ignore truth
27:20and it's because the oppressor of Truth
27:22does not go oh great you caught me you
27:25know they do the equivalent of a smack
27:26to the forehead that's got you on your
27:28back um I'm going to come back to the
27:30second quote but in all the litigation
27:33that happened with Enron there were
27:34other people that had come before me
27:35that had protested the conflict of
27:38interest or protested the structures
27:40themselves and they had been demoted or
27:42ignored Cliff Baer was this wonderful
27:45guy that got ignored and resigned and
27:48he's the one that killed himself in
27:49January of 2002 and his suicide note
27:52said where it was once great pride now
27:54there's
27:55none um you know it the board of
27:59directors was asking questions and you
28:01know you're the top dog and if if you're
28:04a board member and you're asking
28:05questions and you continue to get the
28:06runaround and you don't get your
28:07questions answered you know you need to
28:10resign um but basically Enron was was
28:15ignoring the bad news now our core
28:17values were respect Integrity
28:20communication and excellence and we had
28:23banners hanging from you know the the
28:26lobbies you had magnets gu toys you know
28:29little things in every conference room
28:30to talk about our core values and the
28:34the quote the Martin Luther King Jr
28:36quote was underneath every communication
28:40comment Our Lives begin to end the day
28:43we remain silent about things that
28:44really
28:45matter um how many people stayed silent
28:48at Enron but this quote is actually
28:50really really
28:52tragic and it's tragic because what does
28:55it really mean something's very
28:57important and you you rationalized
28:58staying quiet you've rationalized that
29:00you're safer or better off being
29:03quiet well a piece of your soul starts
29:06to erode and when you're at the end of
29:08your life and it feels like your life's
29:09been somewhat purposeless and
29:11meaningless you realize it goes back to
29:13that decision where you decided to stay
29:15silent and I know too many people that
29:18kind of rationalized that the Department
29:20of Justice Just got aggressive or
29:22started looking you know was popular to
29:25to prosecute white collar crime but it's
29:28very important to say something we had a
29:30lunch conversation about you know would
29:32I do something differently one of the
29:34faculty said that he's talked to
29:36whistleblowers and they almost all say
29:38they paid too high of a price and they
29:40don't know if they would do it
29:42again but I think the problem is they're
29:45comparing their post whistleblowing life
29:49with their pre- ethical dilemma life so
29:53they're thinking about how things were
29:56before the ethical dilemma landed on
29:58their desk but once the ethical dilemma
30:01lands on your desk you have to make a
30:05choice and they chose to say something
30:08and life has been rough and they're
30:10comparing it to how life was before the
30:14ethical dilemma but really they need to
30:16compare it to what would your life be
30:18like if you would rationalize staying
30:20silent and how would you really feel
30:22about
30:23yourself living with that
30:26rationalization and really deep down at
30:28your core you wouldn't be happy with
30:30yourself you know you spoke up you you
30:33were courageous you know deep down you
30:35might have paid a big price but you're
30:38proud of yourself for doing that you
30:40know you you it's not fair it's not just
30:44that you had the ethical dilemma AC
30:46cross across your plate but it did so I
30:50quite often use the deer and the
30:51headlight example you know you the deer
30:55is what's this what's this it doesn't
30:56necessarily look good it's a bright
30:58light you know they're mesmerized by it
31:00they stay in the road and they get
31:01smushed dead um when something crosses
31:05your plate I think I made a mistake in
31:08going it
31:09alone um seek peer support you know
31:12you're likely to find others that feel
31:13the same way go in as a group but do
31:17something you know don't go along it's
31:20so easy to be like that deer and just
31:24say well I don't quite know what to do
31:26um and what should I do and you know the
31:28ethical dilemma is going to sweep you
31:30along and you have I know far too many
31:32friends that are felons because they
31:35just didn't
31:36protest um
31:39the um I can come back to this when it
31:42gets to the whistleblowing situation but
31:44you know the friends that are
31:46felons um you had the Department of
31:48Justice was looking for three things
31:51that you were an executive that sold
31:53stock so you benefited from enron's high
31:55stock price you knew there was fluffing
31:58your numbers and you made public
31:59statements to in potential investors
32:02contrary to your knowledge so if you
32:04look down obviously kinl was asleep at
32:06the switch he got convicted for things
32:08he did after I met with him and after
32:10other people warned him of problems I
32:12consider Jeff Skilling and Andy Fastow
32:15like the swindlers in the emperor New
32:17Emperor's New Clothes they were really
32:18the flawed leaders that perpetrated the
32:20fraud um Ben glissen Michael copper they
32:23were kind of Andy's henchmen but most of
32:26these other people were really the deer
32:28in the headlights the business unit
32:31people are great folks they might have
32:33just had a an earnings Target of 100
32:35million dollar they actually were going
32:37to make 96 at Enron you couldn't miss
32:39your earnings Target so they sold an
32:41asset to Andy for you know a $4 million
32:43profit and made the earnings
32:45Target um you know you just don't want
32:47to go along here are the folks that are
32:49felons that that had probation the
32:52bottom initials mean that you settle
32:53with the SEC neither confirming nor
32:56denying wrongdoing
32:58um still not good on your resume really
33:00you know um there were you know uh Marl
33:04Lynch bankers and Nat West Bankers that
33:06went to prison for their um dealings
33:08with Enron and then there were a lot of
33:11civil fines for the
33:13banks
33:15um shareholder suits you know it it was
33:19really a mess so what are the takeaways
33:22from
33:24this I think you need to cultivate or
33:27kind of seek out
33:29organizations that um make it easier to
33:33admit something's gone
33:35wrong I I really think it's just in our
33:38nature
33:40to make excuses or try to blame shift
33:44you know go back to Adam and Eve you
33:46know Adam you know God says to Adam did
33:48you eat that apple he doesn't say yes he
33:51says well it was the woman you made me
33:54so I think that's just indicative of
33:56what's in our human nature don't want
34:00to have done something wrong but it
34:03really covers the whole you know it can
34:06be absorbed within a whole
34:09organization Charles
34:11McKay was a Scottish historian from the
34:141800s I like his quotes you know men go
34:17mad in herds but recover their senses
34:19slowly one by one but I really like his
34:22quotes on error that once you've kind of
34:23adopted an erroneous position truth gets
34:27the intruder is welcome and I have found
34:30that to be the case and you know what do
34:32you do with an intruder you do try to
34:33shoot him in the head you know so The
34:35Whistleblower gets shot you know truth
34:37gets denied how do you build an
34:39organization that that um that allows
34:43bad news to get to the top I'm going to
34:44come back to the Whistleblower
34:46Protections in a minute um but you know
34:50what should you look for in an
34:51organization one your leaders do need to
34:53have pristine ethics what I failed to
34:56realize is that you know all the chinks
34:58and klay's armor were very significant
35:00he um used the corporate jets for
35:03private purposes to a degree that it was
35:05kind of Gossip employee gossip um he
35:08made us all use his sister's travel
35:11agency it was incompetent and high cost
35:15it's hard to imagine having to go
35:17through a travel agency to travel but
35:18back in the 90s you know there was
35:20really no you know going on us A's
35:22website and booking a flight he was
35:25telling the executives look I'm at the
35:27top I'm moving company assets to me or
35:30my family you you know they got the
35:31message you know Andy fastel heard it
35:33loud and clear um we did not have good
35:37ways for bad news to get to the top
35:40really the messenger was shot if anyone
35:42was no longer it turns out that the HR
35:44department if they got any kind of
35:46complaint and the person was not
35:48currently employed at Enron they chunked
35:50it in the trash and just considered it
35:51discr employee they didn't even
35:54investigate you know what was in the
35:56report um if you were great with
35:58customers great with producing earnings
36:00you could violate enron's policies and
36:02still remain employed that was
36:04problematic um and there really weren't
36:07good informal
36:09channels um for the leaders to hear bad
36:11news I think that's very important when
36:14I was at Arthur Anderson and I think it
36:16was still being well-run you'd see the
36:18leaders have um these kind of focus
36:22groups that would include firste staff
36:25seniors and managers that they'd meet
36:27with
36:28once a month for half a year and then
36:30after that you know after they finish
36:32with that group they would get you know
36:34six new ones to do that with so they
36:36could just hear what what's the
36:38scuttlebutt what's the water cooler talk
36:40what's going on building trust and
36:42Rapport that this is a safe environment
36:43you can bring up anything but good
36:45leaders do develop those informal lines
36:49of
36:49communication um the you know for
36:54yourself if you are challenged do seek
36:56peer report do SE seek some peers to see
37:00you know what else they feel about it
37:01but don't I have this 3M test and that
37:04means if you would be embarrassed to
37:06discuss a transaction with a mentor you
37:08most respect and admire you know it's
37:10problematic if you wouldn't want it on
37:12the front page of the media it's
37:13problematic and then the last one is the
37:15catchall if you didn't want your mother
37:17to find out about it um you know you
37:19should do something um so so say
37:24something do something now I also
37:26counsel speak your truth to power put it
37:29in writing but don't get married to
37:31fixing it you can't change the value
37:33system unless you're the leader you know
37:36you speak truth to power and then it's
37:38up to them to do the right thing so what
37:40about whistleblowing right now you know
37:43it is it's been horrible for wh
37:45whistleblowers um the truth is there's
37:47usually loss of job loss of marriage
37:49loss of Health um loss of house and
37:52Friends Steve aragos had some statistics
37:55in his class yesterday that I visited
37:58about the tactics that those in power
38:01will do and if they can't just fire you
38:04outright if they can't really put you in
38:08a financial strain they will start
38:09spreading rumors and that happened to me
38:12um they try to start spreading
38:14rumors you know I think for me they were
38:16trying to say I was a
38:18manher or you know some it was they
38:22would it was sort of a shotgun approach
38:23of trying different things um one of
38:26their lawyers was saying well she's no C
38:31but you know you see what that means
38:32it's kind of like saying well he's no
38:33wife beater but you've brought it up you
38:35know you put that wife beater word out
38:38there um so it was all these things that
38:40were still negative you know trying to
38:44make dismiss the
38:47Whistleblower um with sorban Oxley act
38:51businesses push backed about The
38:53Whistleblower Provisions that um
38:56regulation that new law got shoved into
38:58the Department of Labor and they
39:01convinced the Secretary of Labor that if
39:03the Whistleblower was not employed by
39:05the publicly traded parent the law did
39:07not provide protections for that
39:09employee so much so that in in a
39:13six-year period out of
39:161,00 um cases where people brought up
39:19problems got got fired and they filed a
39:21socks whistleblower case 841 were
39:25dismissed on the technicality that the
39:27employee was not part was not employed
39:30by the publicly traded parent when Wall
39:32Street collapsed Congress went looking
39:34for Wall Street whistleblowers out of
39:37this
39:37841 and they found one at City Bank and
39:40Leman brothers and so they got really
39:43agitated like could we have prevented
39:46the collapses of 2008 had these folks
39:49been listened to in 2005 and 2006
39:52instead of being fired um and we didn't
39:55even give them any protections so what
39:57happened was Dodd Frank Dodd
40:02Frank um gives a 10 to 30% bounty on the
40:08SEC fines for financial
40:11wrongdoing it is it is really amazing it
40:14got put in place in
40:162010 and the the country is becoming a
40:20wash in law firms that have opened up
40:22whistleblower advocacy
40:24groups um they can get paid now The
40:27Whistleblower usually has that loss of
40:29job they're in a financial strain they
40:32don't have an ability to even to even
40:33know how to find the right lawyer well
40:36now there's great resources
40:37whistleblower org singular
40:39whistleblowers do org plural great books
40:43that are out um you know to me I felt
40:46such relief when I had that powers
40:48report that backed up everything I was
40:50saying um the loneliness of blowing the
40:53whistle is now you know quickly
40:55alleviated when you have Smart Sharp
40:58lawyers you know that are now helping
41:00you on the idea that they're going to
41:02get paid out of this bounty program um I
41:05put a third book up here called The
41:07Naked Corporation it's actually like a
41:0910-year-old book but it says in this new
41:12age and it's got some additions but with
41:15Wikileaks with the
41:16internet um in this new age it says if
41:20you're going to be naked you better be
41:21buff but the point being that if
41:25corporations are doing wrong things they
41:26are going to get caught you know you you
41:28really don't want to start a policy of
41:31sweeping things under the the rug
41:33anymore um there's a a new thing with
41:38um um Dodd Frank that you can actually
41:43be part of the problem you can be within
41:45the accounting department helping to
41:47book wrong entries come to Jesus and
41:50decide you don't want to do that anymore
41:51and you can try to correct it within
41:53your company if they don't correct it
41:55you can go to the SEC and you can still
41:57get the 30% Bounty program because they
42:00really want the wrongdoing to surface to
42:03the top I spoke at an ABA conference
42:06last month and they said that anyone can
42:09report it so they said corporations keep
42:11fighting it but they don't realize that
42:13if wrongdoing is brought up internally
42:15the head of the audit Committee of the
42:17board could decide he's just going to
42:18report it and you get to stay Anonymous
42:21No One Ever Knows you did it it's very
42:23very helpful so I think it is a
42:24different world I'm very happy about it
42:26but here's the problem we still face
42:29I'll just read this to you because it is
42:30kind of tiny print with all this stuff
42:32with Dodd Frank Richard levik is the
42:34head of a crisis management firm he
42:36wrote the whistleblowers who are most
42:39credible and who can therefore hurt you
42:41the most are genuinely appalled by
42:43whatever Mis prison they've learned
42:44about their driving intent is to see the
42:46problem
42:47corrected now that sums up most
42:51corporations attitude towards
42:52whistleblower The Whistleblower that can
42:54hurt you the most is the one that's
42:56trying to help you the most you know
42:58they they really don't like this problem
43:00they want to see it fixed the attitude
43:02towards whistleblowers still has a long
43:04way to go but it is it is moving in the
43:07right direction that is for sure so um
43:11what to look for in employees really and
43:14companies to invest in I really pay
43:16attention to what the CEO says I want to
43:20see a CEO that's always talking about um
43:24his culture his employees his products
43:27his services and one that never talks
43:30about shareholder value or making their
43:32company attractive to investors you
43:35really want to see a CEO that just loves
43:38the products and services of their
43:41organization you know loves what they're
43:43doing you know has a a great admiration
43:46for the employees that make it happen
43:49and um you're you're more than halfway
43:51home and either working for a company
43:53like that or investing in a company like
43:55that it is the tone at the top
43:57um you you get Snippets into the windows
44:00of their soul by what they say and what
44:02they do and you pay attention to those
44:04things um we've got some time for
44:08question and answer um my last little
44:11warning is just you know why do sayings
44:14like the Frog and boiling water that
44:16story why do they exist um it's really
44:19the case and if you heard that the Frog
44:21thrown in boiling water will leap out to
44:22save himself but if you put him in cool
44:24water and slowly heat it he becomes
44:26lethargic and can't jump out that means
44:29it's all about those rationalizations
44:31the first time your gut bothers you
44:33you've got to do something about it
44:35because the second you start to
44:36rationalize that you need to think about
44:38it study it um there might be a point to
44:42why it's being done you know you've
44:44become comfortable in the lukewarm water
44:46that's soon to be hot you know and you
44:48you lose your energy to jump out it is
44:51those small steps in the wrong direction
44:53and you have to pay attention early so
44:56the best organization s just value their
44:58culture their value system they pay
45:00attention to those small things and they
45:02jump on it quickly so let me just finish
45:04with that and um let's open it up to
45:06question answer okay got a question up
45:08here started by that
45:11from
45:13compies dra any lessons conclusions
45:18about um this was did everyone hear that
45:20it was the merger of two regulated gas
45:22pipeline companies um deregulation is is
45:27sometimes sticky I think it can be if
45:29done right and with the right market
45:31analysis sometimes it's the right thing
45:34Jeff Skilling his claim to fame was
45:36really helping to start a gas bank and
45:38the deregulation of gas as a as a
45:42regulated price and that did add a lot
45:45of efficiency um I know that um the
45:49deregulation of the airline industry I
45:51fly from Houston to New York a lot
45:53cheaper than I used to you know decades
45:56ago um I I like some deregulation but it
46:00has to make sense electricity is doesn't
46:03make sense it's not really a commodity
46:05that you can ship from California to New
46:07York um I worry sometimes about you know
46:13an
46:14overzealous um deregulation of certain
46:18industries it it doesn't um you know
46:21enron's problems were flawed leadership
46:24and then pushing too hard and taking
46:25advantage of California
46:27halfway deregulated environment if you
46:30saw the movie smartest guys in the room
46:31it kind of discusses the fact that
46:33electricity is probably not the best
46:34thing to be deregulated I don't know
46:37that it's not really within my expertise
46:40but I I still blame the issues at Enron
46:42with the
46:44leadership what do you think um what
46:47process could the board of directors put
46:49in place to be better informed what was
46:52going on um this was a question on what
46:54the board of directors could do to be
46:56better informed and the the easiest
46:59thing for a board of directors to do is
47:02develop informal lines of
47:04communication with certain heads like
47:06the head of the audit committee should
47:09be going to lunch with the head of risk
47:11management and the head of internal laot
47:13at once a month and for years it might
47:16just be a lunch but the one time you
47:19know that the head of R management says
47:21okay you're you've got a board meeting
47:23coming up in two weeks you know you
47:25didn't hear it from me
47:27but I want you to ask these five
47:29questions when they present this
47:31particular
47:32transaction um there's trust there's a
47:34feeling that I can tell you that and
47:36you're not going to you know say where
47:38you heard this you're just going to look
47:39really smart you know wow those are
47:40insightful questions um but you those
47:43informal lines of communication is where
47:47you you're going to hear bad news and be
47:49able to to deal with it and I think
47:51that's the best thing for for board
47:54members I no on the
47:58list she's a spouse what did she do to
48:02cause the jail time so Leaf fow went to
48:05prison for one year um she was um a
48:09Kellogg graduate she was assistant
48:11Treasurer at
48:12Enron um she stopped working when she
48:15had two children but Andy Fastow first
48:19did some off-balance sheet structures um
48:23he didn't have the permission to do ljm
48:25ljm was when the board of directors
48:27waved the code of conduct and Andy
48:29formed a $500 million investment firm he
48:32was a general partner he raised $500
48:34million of limited F limited Partner
48:36money and he did business with Enron
48:38just a crazy setup but before he got
48:41permission to do that he actually set up
48:44some friends of Enron in off-balance
48:47sheet
48:48structures and did some things that made
48:52money for that structure and they were
48:55giving gifts to their kids so $10,000
48:58checks to Lee and Andy's kid kids and
49:02then when they had more money than they
49:04knew what to do with they hired Lee as
49:06an executive assistant and paid her like
49:0863,000 a year but she there was no real
49:11job she did wasn't doing any kind of
49:13role a pretty
49:15minor in the scheme of things but Andy
49:18was charged with 99 criminal counts and
49:21he was not
49:22cooperating he had the money defied he'
49:25hired a sharp set of lawyers and they
49:29wanted him to cooperate so they could
49:31get kenlay and Jeff Skilling and so they
49:34charged her with tax evasion and other
49:36problems because she did have her
49:38fingerprints on some on some of this
49:40stuff and so once and they were
49:42threatening that they were going to put
49:43them both in prison at the same time and
49:45your kids are going to be orphaned and
49:47so it made them both come in um and she
49:49ended up with one
49:52year
49:54so as you know business school case
49:58about Enron in which the
50:02terms
50:04originator and traitor occur frequently
50:08Originators my sense is were the people
50:10you describe who were motivated and
50:15incentivized to be Innovative in
50:18creating new kinds of
50:20deals in your view of all of this to
50:24what extent were
50:27many of those Innovations really quite
50:30legitimate value creating business
50:33transactions as opposed to these unusual
50:37transactions that that caused you to be
50:41concerned yes well Enron was a highly
50:44Innovative company um the he's asking
50:49about you know it sounds to me like did
50:52we ever do anything good you know
50:54instead of just all the rot um but but
50:56we did I mean the gas bank and the gas
50:58trading were innovative ideas we really
51:01were out in front of the NX helping to
51:04get those markets created the stuff that
51:07Enron was initially looking at at
51:08Broadband you know was Innovative it's
51:10what Netflix does today um when I was
51:14talking to the students I said you know
51:16it was fun to work at Enron because you
51:17really could get a budget and start to
51:19pursue a business idea but I said it was
51:22a bit like Formula 1 race are driving
51:27you know it's fast it's fun but it's
51:31actually not as risky as you think
51:33because um they have fuel flameless fuel
51:38flame retardant jumper that you wear the
51:40crash box the helmet you come in and you
51:43change your tires after so many laps you
51:46know there's there's a lot of control
51:48around
51:49fast-paced business activity Formula 1
51:52race car driving Enron in effect was a
51:56Formula 1 race car driver that decided
51:59let's not do tire changes we'll just
52:01take the risk we want to win this race
52:04let's remove the crash box that a make
52:05us lighter we'll just be careful around
52:07the curves you know they just started to
52:11emasculate their risk management
52:13outsourc their internal audit just did
52:16not respect and value the control and
52:18risk management functions that are
52:19critical within an organization and so
52:22people wasted money in Broadband a
52:24billion dollars just went out the door
52:26on some sun servers that were going to
52:28be obsolete by the time we got them all
52:29hooked up you know so there were sort of
52:32you you just don't
52:34let young people just run with it
52:37without some supervision and the problem
52:40in the trading World Traders are very
52:43predatory they're motivated to get every
52:47ounce of blood out of their counterparty
52:50and you have to have the right
52:51supervision around them because they'll
52:52do if if unsupervised or an enron's case
52:55when they're promoted to management
52:57they'll do what Enron did in California
52:59which is to be so predatory they
53:02bankrupted their two major
53:03counterparties in California you know so
53:06you you don't want to be so predatory
53:07you kill you know your your
53:10customers um Enron you're in a trading
53:14shop I mean this sounds a little graphic
53:17but you're really meant to keep those
53:19traders in a cage you pay them very well
53:22but they stay in a cage you don't
53:24promote them outside the cage to
53:25management
53:27and Enron promoted them outside the cage
53:29to
53:30management
53:32so we've got in the back
53:40there um you mean on Enron yes I think
53:43the movie the smartest guys in the room
53:45is is very good because you watch it and
53:47in two hours you kind of get um the
53:50feeling I like Alex Gibney he's a
53:51director that tries to interview the
53:54people that kind of got sucked into it
53:57you know where he interviews young
53:58Traders young people one guy even says
54:01hey look you know if if I'm on my way to
54:04being reviewed and I can stomp on your
54:06neck and that's going to push me into
54:07the next level higher I'm going to stomp
54:09on your neck you know you get the sense
54:11of of this Cutthroat culture um but I
54:15also
54:16think um this middle book The
54:18whistleblowers handbook is very good um
54:22it if someone's within an organization
54:24the books and the websites kind of so
54:26you thinking about blowing the whistle
54:28let's walk through your situation you
54:30know there's really some helpful
54:31guidelines on some of these these
54:36websites
54:39your called
54:47bycle um I I really it is not it didn't
54:50make it all the way down to Texas I've
54:52heard a lot about it in the two days
54:53I've been here so far um but you know I
54:57you see I think universities are better
55:00at um trying to address it I mean I
55:04think human nature is to give Truth The
55:07Intruders welcome so you have to fight
55:09against that but um I I see universities
55:13tackle ethical problems so much quicker
55:16um I think I I was talking to the dean
55:18about and he was just saying brand it's
55:20a brand brand brand and you really are
55:22valuing your brand um so I think that
55:25that they just it might seem like it's
55:29taking a long time or it was problematic
55:31or it might have been mishandled but
55:33compared to business it it wasn't it
55:36really was addressed you know faster
55:39than you than you might think um it
55:44it's it's you you want bad news to get
55:47to the top you want ways for things to
55:49be reported years it well it was but I'm
55:52talking about from when it was known to
55:55now and what the real action is you know
55:57so it might have gone unknown for 10
55:59years um
56:02but I mean it
56:04happens a lot flawed research research
56:08stuff um you're not alone and I think
56:12once it became public it seems like it
56:14it was you know addressed in a way
56:17that's pretty
56:18proactive um yeah it's probably more
56:20personal to y'all than you realize it's
56:22it it is it has not damaged your brand
56:24and you're in the right direction
56:27um I see too many businesses that I mean
56:30Enron was trying to get away with
56:31blaming Andy Fastow and never coming
56:33clean there's a sense in this country
56:36that there were real problems on Wall
56:38Street and we still haven't addressed it
56:41um you know
56:43there if you've admitted that
56:45something's wrong and you're trying to
56:47address it that is half the battle and
56:49and Wall Street still not fixed um
56:55so one of your slides you indicated that
56:57you also uh presented yourself to
57:00Anderson with the issues what was their
57:03response well before I went to meet with
57:06kinlay I called Jim Hecker who was a
57:09partner at Anderson who had been a
57:10mentor of mine and I went through the
57:12Raptor transactions with him and went
57:16through some of the specifics and he
57:19said well rest assured that you know for
57:21these structures to work at all there
57:24has to be outside equity money at risk
57:27and they have to get their their
57:29investment back last and that was not
57:31the case and when I explained the
57:33situation to him he said what you're
57:35it's flawed it's not working rest
57:37assured you should go to kinlay it it
57:39doesn't work now then he then went and
57:41held some meetings within Arthur
57:43Anderson to say Hey you know I think his
57:46title of his memo was The Smoking Gun
57:48that won't go out you know like we're
57:50almost like The Jig Is up we're going to
57:52you know things are are going to crash
57:55Anderson started to get a backbone but
57:57you know it was kind of too little too
57:58late you know a 10q was never filed for
58:01that third quarter they tried to say we
58:03couldn't write it off the way we were
58:04doing it um but I'll still never
58:06understand what happened to Arthur
58:07Anderson in their trial it came out that
58:10they considered Enron their riskiest
58:11worldwide client yet it also came out
58:14that in their peer reviews of the
58:17engagement partner and his team they
58:20considered the team a two and five was
58:23the best for technical Proficiency in a
58:25really good audit team one was the worst
58:28so why do you allow a two team to be on
58:31your riskiest worldwide
58:34client
58:54so so I don't know if y'all heard the
58:56question but it's basically is kinlay
58:58really dead
59:08um yeah so um yeah the question is did
59:11he contribute and I actually think he
59:13probably did contribute to his death
59:16only because um this there's many
59:19circumstances that are very questionable
59:21he had been um found guilty sentencing
59:24had not yet happened um you can't try a
59:27dead man you know he wasn't going to be
59:29able to go through his appeals and all
59:30that so with him being dead his family
59:32was able to keep the last 40 million you
59:35know that he had um they had had six
59:39houses in Aspen they had sold them you
59:42know throughout all this this was now
59:442006 um they had plenty of friends in
59:47Aspen but they were staying way out in
59:49the county just outside of Aspen where
59:51the coroner is just sees less death
59:54there's less population
59:57um high altitude does you know put you
1:00:00in certain conditions that aren't
1:00:02healthy um but he was not known to have
1:00:05heart problems he was a pretty fit man
1:00:08and Linda had him cremated within 24
1:00:12hours um Family hadn't even flown up um
1:00:15my family happens to own a funeral home
1:00:17and I also had know an executive that
1:00:19runs a funeral home business and there's
1:00:21just a strong need for people to see the
1:00:22body and Say Goodbye so to cremate
1:00:25before
1:00:26children are even flying up to say
1:00:29goodbye is sort of indicative of you
1:00:31know take this pill it's going to cause
1:00:33a heart attack but an insurance company
1:00:36with a tissue sample is going to find it
1:00:38so get rid of the evidence as fast as
1:00:39you can um most people in the think
1:00:43that's kind of what
1:00:44happened so and you had a question I was
1:00:48just gonna say ask a question because we
1:00:49have a lot of aspiring accountants here
1:00:51today and some of us are going into
1:00:52audit and in our audit class we talked
1:00:54about how tips are really the number one
1:00:57way that fraud is identified so can you
1:00:59just remark to those of us that are
1:01:01going into the accounting industry
1:01:02particularly audit you know what what is
1:01:04our role and what can we expect as our
1:01:06you know what can how effective are we
1:01:08really um andan that's actually a great
1:01:10question I mean I I am a proponent of
1:01:12internal audit and really like the
1:01:15outside auditor should look at how the
1:01:17system of internal controls and internal
1:01:19audit is working within the company and
1:01:22I don't think internal controls should
1:01:24be goldplated you know or bulletproof
1:01:27because that's too costly but you do
1:01:29need to see that the internal control
1:01:30system is robust enough to identify
1:01:33ethically challenged employees and that
1:01:35the organization is firing ethically
1:01:37challenged employees if they keep
1:01:39someone who has violated the the control
1:01:42policies the procedures the policies um
1:01:45that person's just going to go more
1:01:46underground they're going to find a way
1:01:48of not being caught so I think audit
1:01:51should almost you know look at how bad
1:01:53news is getting to the top within an
1:01:55organization
1:01:57sometimes the final four don't really
1:01:59like to hear me say that internal audit
1:02:01should not be outsourced because they do
1:02:03like to do that for clients but um it's
1:02:06the same reason a board should develop
1:02:08informal lines of communication if a
1:02:11company has an internal audit Department
1:02:13you know generally when they're young
1:02:14there's a lot of interchange and I might
1:02:16have settled in the internal audit
1:02:18department but my best friend David is
1:02:20in an operating Division and he calls me
1:02:23up one quarter and says look you didn't
1:02:25hear it from me but when y'all come in
1:02:26to do your review next year pull these
1:02:29three
1:02:30transactions um you know he feels safe
1:02:32in doing that because we've been friends
1:02:34and colleagues for five years you know
1:02:36an internal audit just just by its
1:02:39Nature has some nice informal lines of
1:02:42communications within a company that I
1:02:44think helps those tips happen and I
1:02:46think the outside Auditors are outside
1:02:49Auditors you know there's not that same
1:02:51trust and Rapport but you can audit
1:02:53whether those kind of systems are in
1:02:55place
1:03:16well I mean I can't comment I don't have
1:03:19a lot of specific knowledge about it but
1:03:21I still don't think we've fixed Wall
1:03:23Street and the drivers there you know
1:03:25from Michael Lewis's you know current
1:03:27book about um the dark pools and things
1:03:30like that to um we we we don't have a
1:03:34good handle on derivatives and what's
1:03:37happening in that in that Financial
1:03:39world and it doesn't feel like it's a
1:03:40fair Level Playing Field um so I I think
1:03:44we do need to address oversight of Wall
1:03:48Street and hedge
1:03:51funds do we have time for one more
1:03:53question or is oh yes over here um so I
1:03:57was just curious about what why you made
1:03:59the decision to go to kenlay rather than
1:04:01going to the SEC especially as you know
1:04:04you mentioned wshap Journal articles
1:04:06started coming out started doing
1:04:09informal investigations kind of what
1:04:12what kept you in that role and what kept
1:04:14you from reaching out was it kind of
1:04:16that idea that you had of kenlay as this
1:04:19Giver who was really trying to fix
1:04:22it yeah the question is just like why I
1:04:25went to kinlay and not outside the
1:04:27company well I went to kinlay in August
1:04:30after Skilling quit and I do feel like
1:04:33if a company Cooks the books their best
1:04:36chance of continuing to have life is to
1:04:39come clean yourself so I was trying to
1:04:42get him to do the right thing they wrote
1:04:46off the structures I was concerned with
1:04:48but not in a way that you can do it you
1:04:50know the the lawyers met with me the day
1:04:53of the earnings announcement and they
1:04:55were like well aren't you happy we wrote
1:04:57off these Raptor structures and I said
1:04:59well no you can't do it this way it's a
1:05:01restatement you know you can't do it as
1:05:04a current period write-off um kinlay had
1:05:07asked me you know have you gone outside
1:05:09the company will you give us time to
1:05:10investigate and I'm like that's my point
1:05:12of why I'm meeting with you I want us to
1:05:14do the right thing well October 16th
1:05:17when they wrote that off um The Wall
1:05:20Street Journal had those articles the
1:05:22next three days and the SEC was was ex
1:05:26investigating by Friday
1:05:30well I did not see I mean to me it's
1:05:33already done you know we're dead in the
1:05:35water the bad news is out there it's
1:05:38very questionable there's no correcting
1:05:40it you know we were the Titanic with a
1:05:43hole but now we've blown a bigger hole
1:05:46um I did
1:05:48not see me coming forward as as helping
1:05:53you know like we we were going to sink
1:05:54anyway I actually just thought my role
1:05:57was done I mean I'm I kind of view it
1:05:59more like an Old Testament Prophet I was
1:06:01speaking truth to the king and then I'm
1:06:03going about my business um I I thought I
1:06:07was done um because I don't I don't know
1:06:11that that to to me the Wall Street
1:06:13Journal made me mad like clearly you've
1:06:15got great information someone gave it to
1:06:17you why didn't you use it in August you
1:06:20know so I didn't really sense that the
1:06:23financial press was was going to help in
1:06:25any way they were already investigating
1:06:27and then with the SEC prior to Dodd
1:06:29Frank the SEC did not really have a
1:06:31great reputation either but we we were
1:06:34already
1:06:35sunk um different people did kind of
1:06:38rise up and say well I saw this and I
1:06:40saw that and it was kind of an
1:06:42interesting phenomena because we were in
1:06:44the news every day and we were on CNBC
1:06:46and CNN and the local news and the
1:06:49people that were raising their hands
1:06:50saying well I saw something wrong they
1:06:53kind of look like they were wanting the
1:06:54media attention
1:06:56you know because the cameras did go
1:06:57follow them and did go get in their face
1:06:59and um I just didn't see where that
1:07:02would have helped um it was kind of a
1:07:05surprise to me when Congress did find my
1:07:08memos in a box of documents and released
1:07:11my name to the press and it it it was it
1:07:16did shake me up and made me very very
1:07:18nervous I was still employed um you know
1:07:21we talked about it my the next day my
1:07:24husband wakes me up and says there's CER
1:07:25camera Cruise you know out in the yard
1:07:28and it really unnerved me they were also
1:07:31in in the back where the garage is and
1:07:35um it I did happen to just pick up my
1:07:39Bible and open it up randomly to this
1:07:42incredible passage in Hebrews 121:3 that
1:07:45you're surrounded by such a great cloud
1:07:46of witnesses you know throw off those
1:07:49burdens keep your eye focused on Jesus
1:07:51and run the race marked out for you very
1:07:53buckup passage you know of you know just
1:07:56go do it um at Enron that day I was
1:07:59going to a business professional women's
1:08:03lunch
1:08:05and got there it was a Tuesday and the
1:08:08speaker opened up with the same three
1:08:11verses and it felt kind of heavy and
1:08:15because I didn't I didn't I thought my
1:08:16role was done I'm still work looking for
1:08:18a job you know I'm still at Enron but
1:08:20not for long it was bankrupt it was in
1:08:22the bankruptcy estate but it really was
1:08:25kind of have a little nudge that it's
1:08:28going to get a little dicey because I
1:08:30that's when I got subpoenaed by the
1:08:31Department of Justice but you know
1:08:33testified in front of two Congressional
1:08:36investigations had all the media
1:08:38attention um but I do feel like I
1:08:42triggered a Biblical promise that you
1:08:44you're here on this Earth for a reason
1:08:46you take a risk for the talents that
1:08:47have been given you and you know you see
1:08:49the baseball players in Field of Dreams
1:08:51it opens up a whole new world and so
1:08:54things have been really tremendous for
1:08:56me emotionally and spiritually not so
1:09:00much financially but emotionally and
1:09:02spiritually and and so I I do think we
1:09:05all have a particular purpose call and
1:09:08vocation um and it's worth being
1:09:10courageous and in pursuing
1:09:14it so
1:09:31Watkins I want to thank you on behalf of
1:09:32the students the staff the faculty and
1:09:34the alumni not only for this
1:09:36presentation but also the various
1:09:37meetings you've had with us over the
1:09:39last few days I found our not only the
1:09:41presentation but our conversation to be
1:09:43very informative and insightful and of
1:09:45of course extremely relevant for a
1:09:47business school I think it's critically
1:09:50important for all of us to think about
1:09:52the implications that fraud has on the
1:09:54capital markets I think it's
1:09:56particularly important for our students
1:09:57to think about the role they need to
1:09:58play once they leave here the smooth
1:10:02functioning of the capital markets
1:10:04requires the Integrity of management
1:10:07inside the
1:10:07corporation and of interest to many of
1:10:10the students here today our Max students
1:10:12we must have competent Auditors of high
1:10:16integrity if investors get to the place
1:10:18where they may have been close to around
1:10:202001 2002 where they no longer trust the
1:10:23communication that firm firms are
1:10:25providing about their financial position
1:10:27their financial performance then our
1:10:29very economic system is at
1:10:31risk sh often tell our students that
1:10:34they need to start thinking about the
1:10:37ethical decisions they're going to make
1:10:39and the level of Integrity in which
1:10:42they're going to practice before they
1:10:43leave here and before they face the
1:10:45ethical dilemma because it usually turns
1:10:47out bad at that point and I think your
1:10:49presentation your conversations have
1:10:51aided in that that thought process for
1:10:53them so thank you again audience thank
1:10:55you for coming and I hope you have a
1:10:56great evening

About this transcript

This page contains the full transcript of Sherron Watkins, former vice president, Enron Corporation by IT Academic Technologies, generated from the public captions YouTube serves with the video. The transcript has 11,860 words across 1,710 segments, with the original timestamps preserved so you can click any line to jump to that moment in the embedded player.

What you can do with it

Use the transcript to take notes, quote the speaker, build a study guide, generate a summary with ChatGPT or Claude via the YouTube Summary tool, or export it as a timed subtitle file with YouTube to SRT. You can also re-open it in the transcriber to translate the transcript into 100+ languages.

Free YouTube transcript tool

YouTube2Text is a free YouTube transcript generator — no signup, no daily limit. Paste any YouTube link and get the full transcript instantly, with timestamps, click-to-jump, translation to 100+ languages, AI prompts for ChatGPT, Claude, and Gemini, and exports to TXT, SRT, VTT, or Markdown.