Concerns Grow Amid Conflicts

Watkins gave Dilg and Hendrick the names of five Enron executives and managers they should interview. The lawyers didn't question any of them, according to records V&E later released to Congress.

A few days later, the law firm reported to Lay that no further investigation was necessary.

The deals that troubled Watkins did have "bad cosmetics" and carried "a serious risk of adverse publicity and litigation," V&E would write in a private report to Enron.

Still, "The facts disclosed through our preliminary investigation do not, in our judgment, warrant a further widespread investigation by independent counsel and auditors."

Enron's investigation of itself was over almost before it began.

David Stulb, the head of Andersen's New York-based investigative unit, was later called to Houston to help with the Enron situation. He looked at the V&E report and said: "It's a whitewash."

Watkins had urged Lay not to hire Vinson & Elkins to investigate her concerns because its lawyers had worked on some of the very deals she challenged. Dilg, who was running the investigation, was the point man for V&E on the Enron account -- which paid the firm $35 million that year.

But Lay not only hired V&E, he authorized the firm to conduct a limited, preliminary inquiry that would neither "second guess" Enron's accounting nor engage in a full-scale independent examination of company documents, a report by the law firm later said.

V&E lawyer Harry M. Reasoner, former managing partner, defended his firm's work. "We were not given the opportunity to do due diligence," Reasoner said, noting that his firm's lawyers had not had unfettered access to Enron employees and records. "You go back to Plato's question of who watched the watchers? You have to be able to trust somebody. In our investigation, Enron made the determination that they could rely on Arthur Andersen's accounting. That seemed very reasonable to us."

Duncan's reference to "control features" and approval from the "highest levels" amounted to the unspooling of a long alibi chain. Everybody associated with Enron was covered -- the lawyers, the accountants, the executives and members of the board. Each could argue they had relied upon the advice and actions of the others as they went along with the deals being questioned.

Watkins had warned that nothing less than a full investigation could save the company. The alibi chain would not hold.

"I realize that we have had a lot of smart people looking at this and a lot of accountants including AA&Co. have blessed the accounting treatment," Watkins, a former Andersen accountant, had cautioned in her memo. "None of that will protect Enron if these transactions are ever disclosed in the bright light of day."