Speaking Truth to Power

Speaking Truth to Power


The fall of 2001 was an eventful and memorable time in United States history, but not for positive reasons. First, there were the devastating terrorist attacks of September 11. Before our nation had even digested the horrific attacks of 9/11, Enron, the nation’s seventh largest company and the world’s largest energy trader, rapidly came unraveled, leading to their declaration of bankruptcy on December 2. Enron’s stock prices had dramatically decreased on October 16, just two months after Sherron Watkins had brought imperative accounting and investment questions to the attention of CEO Kenneth Lay.[i] Was Watkins utilizing deontological or utilitarian ethical approaches in blowing Enron’s whistle? Was her intent to bring the greatest good to the most number of people, or was she doing it for the future profitability and reputation of Enron?

During the 1990s, Enron underwent a series of aggressive transformations that converted the company from an asset-based pipeline and power generating company to a marketing and logistics energy-trading organization whose biggest assets were its well-established business approaches.[ii] Throughout their time at Enron, Kenneth Lay, Jeffrey Skilling, and other top executives were intently focused on enhancing the company’s operating results by strengthening earnings. These executives made no attempt to hide their desires to make Enron the “world’s greatest company”. Unfortunately, Lay, Skilling, and thousands of other Enron employees were never able to realize the dream because of the company’s rapid downfall. In 2001, Enron quickly unraveled as a result of significant financial problems. These fiscal issues came to light by the public’s knowledge of the executive managers’ questionable accounting and financial reporting decisions. In addition to Enron’s leaders, the company’s accountants at Arthur Anderson were also in the hot seat.[iii]

Enron’s rapid downfall resulted from decisions made by company executives to use a variety of complicated accounting and investment methods to report company earnings. Such tactics included market-to-market accounting, as well as limited liability partnerships, to remove enormous losses from Enron’s financial statements and to inflate stock prices.[iv] The use of market-to- market accounting enabled the company to book potential future profits on the day that long-term energy contracts were signed, regardless of the amount of cash that they received. This essentially allowed Enron the opportunity to report that their profits where whatever they wanted them to be. [v]

The second tactic that lead to Enron’s collapse was the use of limited liability partnerships known as special purpose entities (SPES) to hedge the company’s high-risk investments in other start up companies. Special purpose entities were used to finance the acquisition of an asset or to fund projects, and were extremely attractive because of the way in which they helped avoid debt. These specific entities provided large companies with techniques to raise finances needed for various purposes without being required to report the debt on their balance sheets. However, unlike most other SPE users, Enron used these special purpose entities for more than just financing activities. Enron used SPEs for the sole purpose of decreasing underperforming assets from its own financial statements and transferring them to the financial statements of their unconsolidated entities. In doing so, Enron was able to hide their losses due to the lack of Federal Accounting Standards Board and Securities and Exchange Commission basic accounting and reporting standards for SPEs. [vi]

Unlike many Enron leaders, Sherron Watkins, Vice-President of Corporate Development, was troubled by the potential consequences that could result from deceiving investors and financial statement users. Sherron Watkins was a certified public accountant at Arthur Andersen, prior to joining Enron in 1993.[vii] As a trained accountant, she had the expertise to detect that her corporation was potentially breaking the law and defrauding the public through their practice of and failure to disclose the market-to-market accounting techniques and special purpose entity relationships. Acting on her knowledge and her gut feelings, Sherron Watkins became known as the Enron whistleblower. Whistleblowing is defined as “reporting by a current or former employee of illegal, inefficient, or unethical practices in an organization to persons who have the power or resources to take action.”[viii] Watkins was different than most whistleblowers in that she was not determined to illustrate disloyalty to the company. Through these actions, the Enron executive displayed her commitment to organizational goals, her allegiance to the company, as well as her strong sense of professional responsibility.

Sherron Watkins’s whistleblower status derives from the letter she wrote to newly appointed CEO, Kenneth Lay, on August 15, 2001, the day after the abrupt resignation of CEO Jeffrey Skilling. In this letter (see Exhibit 1), the vice president outlines the ethical and illegal financial management practices of both Enron and its accounts, Arthur Andersen.[ix] She expresses her fear that Enron will “implode in a wave of scandals” when the general public learns that Enron had essentially hidden losses on their financial statements through the use of special purpose entities.[x] Watkins additionally asks Lay if accountants could “unwind these deals now,” to try to avoid an organizational scandal.[xi] Ms. Watkins communicated her concerns that the footnotes to Enron’s financial statements were insufficient in providing users with the adequate understanding of the complex accounting methods that Enron used.[xii] In a former interview, the whistleblower states that she viewed Ken Lay as “an honorable, ethical man,”[xiii] which gave her hope that Lay would take immediate action to right Enron’s wrongs.

Many individuals were not pleased with Watkins’s choice to act on her knowledge, but these people also failed to recognize the required to approach Ken Lay about the matter. Time magazine Person of the Year for 2002 chose to recognize Sherron Watkins as a “heroic” figure.[xiv] Viewing a whistleblower in this light is drastically different than the untrustworthy traitor reputation often associated with such figures. Watkins illustrated her duty of loyalty towards Enron in acting in good faith and in a manner that she reasonably believed would be in the best interest of the company as a whole, in addition to the general public. Overall Watkins illustrated integrity that is so often rare in large organizations.

Sherron Watkins believed “good always prevailed” and was determined that “the people in charge at Enron would be grateful to her for pointing out a problem and suggesting solutions.”[xv] Rather than going straight to media outlets or other outside sources, Watkins strategically considered the most effective way to approach this problem. She determined that confronting newly appointed CEO, Ken Lay, to be the most appropriate course of action. In choosing this approach, Watkins showed that she was looking out for the best interest of Enron. Additionally, she focused on calling attention to the questionable accounting transactions that she had noted, rather than attacking the morality of CEO executives and Arthur Andersen auditors. In an interview four years after the collapse of Enron, Watkins stated that she “hope[d] to ma[ke the] point that Enron needed to address this situation. Companies rarely get away with cooking the books, but, when they do survive, it’s when they come clean, not when they are exposed from the outside.” [xvi] Sherron Watkins’s decision to go to CEO Ken Lay regarding her concerns can be evaluated in terms of both utilitarian and deontological ethics.

The utilitarian ethical approach states that “an action is morally right if and only if it produces at least as much good for all people affected by the action as any alternative action.”[xvii] Utilitarianism focuses on choosing the result that will create the most amount of good for the greatest number of people. This theory additionally focuses on the outcomes of actions, and states that it is an individual’s moral duty to take the action that they believe will create the best results.[xviii] Under this approach, Watkins would have evaluated the various actions she could take and the potential results of each. First, Watkins could have not acted on the information at all, which would have resulted in Enron continuing to deceive investors and financial statement users. This option places her at risk of being accused of withholding vital information when the authorities eventually uncovered Enron’s situation. Second, she could have immediately taken her concerns to federal investigators without allowing Enron time to attempt to reverse their mistakes. This option would have resulted in the immediate demise of the company and all of its employees. Third, Watkins could go to her superior and beg that the company strive to correct their wrongs. This option would likely result in her losing her job for potentially being viewed as a disloyal traitor. Watkins ultimately decided that potentially losing her job outweighed not acting at all or being an external traitor by going straight to federal authorities. She correctly reasoned that this option would be the most beneficial for Enron employees, investors, and associated families.

While a utilitarian ethical approach focuses on what will maximize societal welfare, a deontological ethical approach focuses on doing what is right.[xix] Deontological ethics maintains that the “moral rightness or wrongness of an action depends on intrinsic qualities rather than on the nature of consequences.”[xx] Under this approach, the action that is to be taken is the one that best benefits duties, rules, and obligations. Therefore, Watkins brought her concerns to the attention of Ken Lay because she felt that it was her duty and obligation as a company employee to help represent the Company in the most accurate and fair manner as possible. In taking this approach, Watkins would choose to confront Lay about Enron’s questionable methods and transactions, and encouraging that Lay to require that “auditing gurus” “unwind [the] deals” immediately,[xxi] or come clean so that the company could survive.

As previously noted, Watkins stated that her intent for writing the letter to Kenneth Lay was to highlight Enron’s need to immediately address the situation before the company’s tactics were exposed by external sources. [xxii] She argued that companies rarely survive when outside sources reveal company wrongdoings, and hoped that Enron would be able to prevent this result. If Enron had held a press conference on August 16, 2001, and admitted to their unethical and deceiving behaviors, would they have survived? Could Enron have recovered from such a large scandal? Would 9/11 have been the only unforgettable catastrophe that fall?

Exhibit 1: Letter from Sherron Watkins to Kenneth Lay. August 15, 2001.
Exhibit 1: Letter from Sherron Watkins to Kenneth Lay. August 15, 2001.


[i] Knapp, Michael C. “Enron Corporation.” Contemporary Auditing: Real Issues and Cases. Tenth Edition. Cengage Learning, 2014. Print.

[ii] Ibid.

[iii] Ibid.

[iv] Ibid.

[v] Enron: The Smartest Guys in the Room. Alliance Films Inc., 2005. Netflix.

[vi] Knapp, Michael C. (2014).

[vii] Swartz, Mimi, and Sherron Watkins. “Aboard the Titanic.” Power Failure: The Inside Story of the Collapse of Enron. New York: Doubleday, 2003. Page 275. Print.

[viii] House, Watt, and Williams. (2004.)

[ix] House, Richard, Anneliese Watt, and Julia M. Williams. “Teaching Enron: The Rhetoric and Ethics of Whistle-Blowing,” Professional Communication, IEEE Transactions, Vol.4 7, No. 4, pp. 244-255, Dec. 2004.

[x] Knapp, Michael C. (2014).

[xi] Ibid.

[xii] Ibid.

[xiii] Erisman, Al. “Did We Learn the Lessons From Enron?” Ethix. 1 June 2007. Web. <http://ethix.org/2007/06/01/did-we-learn-the-lessons-from-enron>.

[xiv] House, Watt, and Williams. (2004.)

[xv] Swartz, Mimi, and Sherron Watkins. “Aboard the Titanic.” Power Failure: The Inside Story of the Collapse of Enron. New York: Doubleday, 2003. Page 275. Print.

[xvi] Enron: The Smartest Guys in the Room. Alliance Films Inc., 2005. Netflix.

[xvii] “Utilitarianism.” The Cambridge Dictionary of Philosophy. Cambridge. Cambridge University Press, 1999. Credo Reference. Web. 21 November 2014.

[xviii] Hales, Steven D. This is Philosophy: An Introduction. Chichester: Wiley, 2012. E-book. p 28.

[xix] Trevino, Linda K., and Katherine A Nelson. “Deciding What’s Right: A Prescriptive Approach.” Managing Business Ethics: Straight Talk About How To Do It Right. 3rd ed. Wiley, John & Sons, Incorporated, 2003. 91. Print.

[xx] “Deontological Ethics.” Britannica Concise Encyclopedia. Chicago: Encyclopedia Britannica, 2012. Credo Reference. Web. 21 November 2014.

[xxi] Sherron Watkins letter to Kenneth Lay. Knapp, Michael C. (2014).

[xxii] Ibid.


Featured Image: Workers remove an Enron logo from the Houston Astros downtown ballpark Thursday, Feb. 28, 2002. Twenty-four hours after announcing that their ballpark will no longer be named for Enron Corp.,  the Astros have started taking down the smaller “Enron Field” signs from what will be known as Astros Field until a new corporate sponsor steps forward to buy the naming rights. (AP Photo/Pat Sullivan)


4 thoughts on “Speaking Truth to Power”

  1. Had she signed off on any of the SPEs, especially? Her letter is about Enron, but about her own future, too. She says she won’t be able to work in corporate America if Enron implodes.

    What did her position as VP of Corporate Development entail?


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