Accounts Deceivable Podcast Series: Season 3, Episode 1 - The Biggest Accounting Fraud in History

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In the end, you walk away realizing that you overestimated human nature.

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Welcome to season three of Accounts Deceivable, a podcast about white collar crime and the devastating impact it has on people, companies, and communities. This season is about the moment of discovery. What happens to the people who uncover criminal activity in their own companies? We'll help you see fraud through the eyes of three infamous whistleblowers, From the biggest corporate invoice fraud in history to small town criminal masterminds, Accounts Deceivable will explore how fraudsters game the system and hear the stories of the incredibly strong employees who expose them.

In episode one, we meet Sherron Watkins, former Enron vice president known for blowing the whistle on one of the most significant corporate accounting scandals in history.

Growing up, native Texan Sherron Watkins never dreamed of being an accountant. As a student at University of Texas at Austin in the late seventies, she remembers selecting her majors somewhat flippantly at the time, unaware of how this seemingly small decision would affect her life.

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Accounting starts with an a. It was near the top.

Math was easy and a subject I liked. And literally, it was just like, okay. I'm gonna check this box. I really did not envision, like, oh, I wanna be an accountant.

It it just kind of happened that way.

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As Sherron progressed through her four years as an undergrad at UT Austin, it became clear that she was a standout in her field. A notoriously difficult career path for many, accounting came naturally to Sherron. As an introvert, she recalls enjoying auditing the books and being in the background. After graduation, Sherron received a prestigious offer to work as an auditor for Arthur Andersen, one of the world's largest accounting firms at that time. After establishing her career and spending eight years in both the Houston and New York offices, Watkins was hired away by MG Trade Finance, a New York subsidiary of Metallge Schiff, where she worked in the commodity finance field for three years until she felt a pull to come back home to Texas.

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I sent my resume to friends that had been Arthur Andersen colleagues that now worked at Enron and found myself with a job offer, which I was thrilled that was the place to work in Houston, Texas in 1993.

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A skilled accountant with experience in the oil and gas industry from her time at Arthur Andersen, Watkins thrived at Enron. But after eight years at the company, one routine day changed everything along with the course of Watkins life as she knew it.

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I stumbled across horrible accounting fraud. It was income statement fraud.

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At first, Watkins was in shock, trying to make sense of what she had found. As things came into focus, it was undeniable. And Sherron felt a strong compulsion to step forward and report her revelation to Enron leadership. But she didn't act until something unexpected happened.

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Our CEO, Jeff Skilling, surprisingly quit the company. I mean, it was shocking. He'd been chief operating officer since 1997. So three years later, he's getting the top job, and he abruptly quits.

And it told me that what I'd stumbled across really was likely fraud. And he was just getting out while the getting was good. You know, these CEOs don't just decide, oh, I need to spend more family time all of a sudden. Like, they don't just get the job and eight months later quit. You know, there's got to be something more here. So it it was not just me. I mean, it it it was sending a message to the market too that something must be wrong.

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Sherron knew she had to act quickly before it was too late. She decided to write an anonymous one page memo to Ken Lay, the founder of Enron who had stepped up as CEO in the wake of Skilling's departure. She sent the memo anonymously, but eventually decided to identify herself and speak with Lay directly.

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I got on Ken Lay's calendar on a Thursday. I was meeting with him the following Wednesday. And I kept waking up at 2:00 in the morning kind of rehearsing how I was going to present this knowing I might just have thirty minutes.

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Ahead of the meeting, Sherron built her case methodically, gathering evidence from numerous colleagues who she believed supported her. Before we hear from Sherron on what happened next, a word from our sponsor, Medius.

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Not only does invoice fraud cost businesses billions of dollars every year, but it's increasingly difficult to prove as technology has advanced. Whistleblowers put their professional and often personal lives on the line to do the right thing and ensure fraudsters don't succeed. They shouldn't also have to worry about the quality of the proof they bring to the table. Medius is an accounts payable software platform that enables finance professionals to combat scams by protecting the integrity of supplier data, auditing the invoice process in real time, and monitoring for insider fraud. For more information or a demo, visit www.medius.com.

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Now, where were we? Walking into Lay's office, evidence in hand, Sherron felt confident he would see what she saw.

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I really felt like I was providing him with evidence, and the evidence would stand on its own. I also thought I had the backing of all these colleagues.

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Quickly into her meeting with Lay, Sherron realized that the two of them did not view the situation or the numbers the same way. Sherron felt the ground begin to shift under her feet.

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I was ignored. He tried to fire me.

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Walking out of her meeting with Ken Lay, word of Sherron's attempt to blow the whistle spread. Colleagues who had previously supported Sherron in gathering information turned their backs on her. She realized she was on her own and began to feel the weight of isolation. A feeling that many whistleblowers talk about.

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And my colleagues backed away. When they saw that I had delivered bad news to the top and and I was being shot, you know, they just clammed up.

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While many privately supported Sherron, she was the only employee to report their concerns to Enron's leadership. Sherron questioned why her other colleagues didn't feel the same desire to do the right thing.

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Do they lack integrity? Do they lack courage? Why are they going along? Why aren't they saying something? So there's a deep disappointment in not only leadership, but colleagues that back away and and take sort of a safe road.

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Don Holm of Medius says that many whistleblowers suffer in the same way, right at the point when they most need their colleagues' support.

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Sherron was empowered to step up, do the right thing, and blow the whistle to senior leadership because she believed she had the support and backing of her colleagues and peers to step up, do the hard thing, be essentially blackballed for it, and then return to diminished support is a crushing but common reality for whistleblowers.

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Things moved quickly after Sherron blew the whistle to Ken Lay in August 2001. By October of the same year, word had started to get out and Enron's stock price plummeted. From there, Sherron recalls the way things spiraled.

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Enron imploded.

Congress instituted, like, 11 congressional investigations into the demise of Enron. There were shareholder lawsuits, and, of course, the government formed an Enron task force. And the DOJ ended up with, you know, over a dozen felonies, almost two dozen. And over a dozen Enron executives went to prison.

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Sherron counts herself lucky to have closure and the relief that comes with it, something many whistleblowers never get.

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Now granted that took from 2001 to 2006 or 07, but I saw vindication. I saw accountability. I saw justice. So I can leave it behind me, so to speak.

And many, many whistleblowers, the oppressor, the manipulator of truth is powerful and keeps going. And even the people within the organization that had read that had led the organization astray stay in positions of power. So that sense of injustice that a wrong has not been righted, that the good people got squashed and the bad people are still in power, That is the primary story of whistleblowers. That's the majority of them have that story.

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Sherron laments the inevitable conflict that blowing the whistle initiates between employer and employee and also between the employees themselves.

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It's a David and Goliath situation where they get squashed and are caught blindsided by all the different tactics that exist to silence the whistleblower. And it's not just being fired. It's being really blackballed from your industry, retaliated against, your credibility, your sanity attacked, just all kinds of tools that go against the whistleblower.

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Sherron's Enron experience highlights what many people fail to realize are the negative ramifications of blowing the whistle, having to find a new job and sometimes a new career. Some are branded with harmful stereotypes for life.

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Whistleblowers face a harmful stigma, often called names such as rat, traitor, or in Sherron's case, snitch. This poor public reception and slander has created a culture that turns many off from doing the right thing even though they may want to. It's critical for organizations to have whistleblowing policies and protections in place, along with technology that helps finance employees recognize, document, and flag suspicious and potentially fraudulent transactions. With this support and evidence, employees can feel more comfortable and confident coming forward.

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Two decades on, from the event that changed Sherron's life, the whistleblower has gained perspective. How did all this happen? She cites what she calls corporate weaponized incompetence and a mob mentality to turn on anyone who questions the status quo.

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So many times they throw up their hands and say, I don't really understand how these things work, but Arthur Andersen has blessed them. The outside lawyers have blessed them. It must work. You know, I am not an accountant, was kind of the standard phrase by by people.

And I hadn't practiced public accounting in a while, but I just knew that, sorry, accounting doesn't get that creative. These structures just didn't work.

So it was alarming to me that smart people were bothered by the structures, but felt like it wasn't their responsibility to say anything.

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Sometimes it's the very success of a company that causes employees to want to protect the story of that success. However, false it turns out to be.

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When I look at, you know, what was the fertile ground that made fraud happen at Enron, And some of it was the hype. Enron was the place to work in Houston, Texas. And the salaries and bonuses were just higher than any of our peer group. So you were making a great salary.

You were making great cash bonuses. And then Enron was compensating you with stock options and stock grants, the stock price kept climbing.

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Sherron now works as a leadership and ethics advocate, speaking around the world on topics such as ethics, corporate governance, organizational behavior, and the toxic label of whistleblower. Much of her day-to-day work includes mentoring the next generation. Asked what advice she has for young people entering the finance sector, Sherron says it's more important than ever to find a business you believe in.

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When evaluating an organization that you want to work for, look to see that they can have a bad quarter. Like, it's actually positive that they fessed up to things not going their way.

You know, that something happened with the market or they missed, you know, x, y, or z, and we're not going to make our targets. That's actually like, yay. They can be honest. Something bad can happen, and they're being honest with their employees and their investors and their shareholders.

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Today, Sherron spends her time helping to change the stigma whistleblowers face and working to establish protections for those who come forward to do the right thing.

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I think my story as well as so many whistleblower stories is how our naivete. We actually think we're providing evidence of wrongdoing. And not so much that we expect a pat on the back, like, you know, oh, great. I'm so glad you brought this to my attention. You know you're delivering bad news, but you expect leadership to recognize it.

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For more chilling stories from victims and fraudsters alike, check out the Accounts Deceivable on Apple, Spotify or wherever else you get your audio fix.