WHEN ENRON WAS RIDING HIGH, in the fall of 1995, an accountant named Sherron Watkins competed in a tournament that her boss, Andy Fastow, had devised, a contest he called the Paint Ball War. The actions that would make both of them famous—Watkins as a corporate whistle-blower and Fastow as a balance-sheet manipulator—lay far in the future, but looking back on her Enron odyssey, Watkins now sees the Paint Ball War as a metaphor for all that would come to pass. Fastow was one of Enron’s brashest Young Turks then, a numbers whiz with a ferocious ambition. The Paint Ball War, in keeping with the mercenary culture of Enron, pitted his employees against a team of Enron’s outside bankers, whom Fastow often raked over the coals for failing to raise enough capital. The bankers came wanting to even the score. Fastow, however, had been transferred to a new division before the competition, and so Watkins—who worked just under him—became the prime target by default. From the moment she strode into the “war zone,” she was pounded with blue paint pellets, one hitting her hard enough to draw blood. The bankers kept striking her until, soaked with blue paint, she was pronounced dead. As she limped off the battlefield, the bankers kept firing at her. “I’m already dead!” she yelled. “Stop shooting me!”

The story of the paint ball barrage appears in the new book Power Failure: The Inside Story of the Collapse of Enron, written by Texas Monthly executive editor Mimi Swartz with Watkins. The Paint Ball War was just one manifestation of the company’s hyperaggressive New Economy culture, which propelled Enron to market domination but later consumed the company’s best and brightest, like Fastow and Watkins. Power Failure charts the company’s rise and fall: its audacious transformation of the global energy market in the early and mid-nineties and later, its hubris in believing that it could fool Wall Street by creating financial entities that concealed the company’s growing debt. Although the book explains the mechanics of how the billion-dollar corporation made itself appear flush on paper even when it was careening toward bankruptcy, Power Failure is, foremost, a book about the culture of Enron. The company was doomed, the book demonstrates, by its voraciousness for profits—real or phony—and a culture of excess among employees that filtered from the top down. “They lived lives based on consumption in its myriad forms,” Swartz writes in Power Failure. “Life was a game, the goal of which was to see how much could be extracted without ever paying up.”

Watkins’ knowledge of Enron, where she worked for nine years, informs the book, as does her perspective as an executive who tried mightily to warn the captain about the sinking ship. In August 2001 she penned the now-famous missive to chairman Ken Lay, warning of “an elaborate accounting hoax” that threatened the viability of the company, then the nation’s seventh largest. “I am incredibly nervous that we will implode in a wave of accounting scandals,” she wrote in a letter that proved to be prescient. After congressional investigators discovered her letter the following January, she testified before House and Senate panels, laying the blame for Enron’s cooked books squarely on several of its top executives, including Fastow, who had found ways to line his own pockets while shifting billions of dollars of Enron’s debt off its balance sheet. Watkins was subsequently lionized by the media, who cast her as “the Enron whistle-blower”; Time magazine put her on its cover, naming her and two other whistle-blowers “Persons of the Year.” At speaking engagements around the country, she was given a heroine’s welcome. But in Houston, the reaction has been mixed.

Although many former Enron employees offered Watkins words of thanks after her congressional testimony, the city’s moneyed establishment has not been so grateful. They hold her, the messenger, accountable for the collapse of Enron—not the executive triumvirate of chairman Lay, CEO Jeff Skilling, and chief financial officer Fastow. Her friendships with former executive colleagues have been strained, her motives second-guessed. When she made a recent appearance at Anthony’s, a restaurant frequented by Houston’s power set, her presence prompted a flurry of eye rolling. At her own church, First Presbyterian, a speech she was slated to deliver to the Men’s Ministry about ethics in the workplace and the lessons she had learned from Enron was canceled for fear that it might offend the Arthur Andersen and Vinson and Elkins partners in the congregation.

“I’m seen as a troublemaker by that elite group in Houston that’s being critiqued by everyone now,” Watkins said on a cold, rainy day in February. The 43-year-old blonde was dressed down for lunch in jeans, a periwinkle turtleneck, and pearl earrings, but she radiated the same fearsome intensity of purpose that had won her promotion after promotion at Enron. Her green eyes were resolute. “People are in disgrace, and they resent the fact that I’ve somehow disrupted the social order,” she said. “They blame me for spoiling all the fun.”

THE DAY HAD BEGUN AT Watkins’ house, a slate-gray, two-story colonial with white trim and an American flag outside. Watkins—along with her husband, Rick, a vice president at an independent oil-and-gas company, and their three-year-old daughter—lives in Southampton, a tony neighborhood north of Rice University. Jeff Skilling used to live a few blocks away; Andy Fastow resides down the street. Until recently, Michael Kopper, the first Enron executive to enter a guilty plea (to charges of conspiracy to commit wire fraud and money laundering) was Watkins’ nearest neighbor. In good times, Southampton was a collegial place where Enron executives enjoyed an easy camaraderie. But as subpoenas have been served and depositions taken, it has felt, to Watkins, increasingly claustrophobic. She may soon have to testify in federal court against Fastow, who has been indicted on 78 counts of fraud and money laundering, among other felonies, but inside this peculiar urban bubble, their children play in the same shady neighborhood park. Sometimes she sees him jogging through Southampton, meandering down its gracious, tree-lined streets, a onetime golden boy with nowhere to go.

Watkins grew up thirty miles from here, in Tomball, a town of 9,500 people that sits on the northern edge of Houston’s suburban sprawl. A German farming community until the thirties, when oil was discovered, Tomball still had two oil derricks on Main Street when Watkins was a girl. She grew up palling around with a group of male cousins, in whose company she developed the confidence and wit that allowed her to hold her own in the corporate world. Tomball made its mark on her; when Watkins was in her twenties, Swartz writes in Power Failure, “she was one of those strapping, blond, good-humored Texas girls whose laugh could fill a room and who could drink her dates under the table.” In her thirties, she was seen by her co-workers as a bull in a china shop. Now in her forties, she has a rigorous, focused mind, and when she speaks, it is always with the calm, measured assurance of a businesswoman intent on proving that she is just as capable as one of the guys, if not more so. In conversation, she reveals her predisposition for accounting; she loves the black-and-white clarity of number crunching but finds the complexities of human nature, such as the corruption of so many decent people by greed, much harder to grasp.

If there is an answer to why she, and not another Enron employee, decided to write Ken Lay about the company’s deceptive accounting practices, it lies in her hometown’s simple virtues. She is descended from the Germans who first settled the area, in the 1850’s, and her upbringing was in keeping with their stern Lutheran values. Every Saturday when she was a girl, there were coffee klatches at her grandmother’s house, where her sprawling family, the Kleins, convened. (Lyle Lovett is a Klein and Watkins’ second cousin.) Sundays were spent at Salem Lutheran Church, where parishioners were taught a strict moral code that was enforced at home; when Watkins misbehaved, spankings were meted out with the back of a wooden spoon.

Her mother, Shirley, who graduated summa cum laude from the University of Texas with a degree in business administration, taught business classes at nearby Klein High School and encouraged her daughter to make a career in accounting. Watkins’ first job handling money was at her uncle’s shop, Klein’s Supermarket, on Main Street, where she worked as a cashier. Here, accounting could not be manipulated or concealed; numbers corresponded to the actual amount of dollars and cents in the register. There were no offshore accounts, no off-the-books partnerships, no off-balance sheet debt. At Klein’s, the profit margin was small, but the math was precise.

After lunch, Watkins offered to take me to Tomball. “I’ll show you where I grew up,” she said, climbing into her green Lexus SUV. “We’ll go see my mother.” The route to her mother’s house is a well-traveled one; during Enron’s collapse, visits to Tomball helped keep her grounded. North of Houston, Watkins turned off of Interstate 45 and headed west toward Tomball. “I don’t think there was a single traffic light here when I grew up,” she said, glancing out the window. She drove down Main Street, past Klein’s Funeral Home and a host of other family-owned businesses, to her mother’s place, a low-slung brick house near the center of town. Before Watkins sent her letter to Ken Lay, she showed it to her mother. “I told her to take out the sarcasm,” Shirley Klein Harrington said with a genial smile once we sat down. Her living room was accented with hand-stitched quilts and potted red poinsettias and the smell of apple dumplings fresh out of the oven, which she served along with strong black coffee. To her right sat Watkins’ stepfather, a good-natured man named H. G. “Hap” Harrington, who has been the mayor of Tomball for twelve years.

The conversation drifted from local politics to the recent space shuttle disaster and then, inevitably, to Enron. “I think a lot of this is the Lord working to get people back to their values,” Shirley observed. “When the Germans around here struck oil, their lives stayed exactly the same. They lived frugally. They gave their money to the church.” The subject of Enron usually comes up on Watkins’ visits. For this family, which took pride in watching the trajectory of her career, and by extension, that of the company, Enron is a topic worthy of rigorous dissection, particularly when there are two accountants, Watkins and her mother, in the same room. Their conversations about Enron have the feel of a civics lesson, for there is the sense at the Harringtons’ home that there is much to be learned from the morality play that is unfolding around them. This particular afternoon, the discussion focused on how Ken Lay had used his $7.5 million revolving line of credit with Enron to personally “borrow” $81 million from the company and repaid the loans with company stock that soon became worthless. Hap shook his head. “He’s no different than Jesse James,” he offered. “I think the whole thing is a dirty shame.”

At the end of the afternoon, Watkins wished her mother and Hap good-bye. “My stepfather just can’t understand how shareholders will end up with nothing,” she said as she pulled out of the driveway. “Enron was the seventh-largest company in America. It called itself ‘the World’s Leading Company.’ Hap will ask me, ‘How can people be left with nothing?’ It’s hard to comprehend.”

BY THE TIME SHE GOT to Enron, Watkins was no longer a small-town girl. Nicknamed the Buzzsaw, she was renowned for her tough talk, greeting male colleagues with Enronian zingers like “When are you guys gonna grow some balls?” Her aggressiveness was learned in the oil patch. After earning her bachelor’s and master’s degrees in accounting at UT, she was hired in 1981 by Arthur Andersen, where she began her career auditing small oil companies. “I didn’t curse before that,” Watkins said as she drove back to Houston. “But at Andersen, they used such foul language, and they did it to see if they could make you blush. You’d be in an audit room, and you’d have two guys—they were always kidding—talking about how they were going to pick up a girl that night and have a threesome. They’d argue about who was going to be on top of her and who was going to get what end of her and all that kind of stuff. Or you’d be at an Astros game, and a partner would get drunk and make a pass at you. So it was this trial by fire. You had to talk the talk. By comparison, I found Enron to be perfectly pleasant. Yes, traders cursed on the floor, and guys talked about who had big boobs, and there was a ‘Hottie Board,’ where they posted pictures of female employees, but relatively speaking, it was mild.”

Her decision to collaborate on a book about her tenure at Enron was in part financial. Like many Enron employees, she found herself out of a job; she resigned last year after receiving almost no work and substantially less pay for months. But Watkins saw a larger purpose in writing a book: chronicling a cautionary tale about corporate corruption in hopes that history will not repeat itself. She has delivered scores of speeches at business schools and ethics symposiums across the country, and her plans for the future center on spreading the gospel of corporate responsibility. “Working on this book has allowed me to look back and reflect on what went wrong,” Watkins said. “The most frustrating thing was trying to figure out, At what moment did Andy Fastow turn crooked? Or Jeff Skilling? But there’s not a defining point where they became corrupt. It was one small step after another, with more and more rationalizations. There was a slow erosion of values over time.”

Power Failure portrays Skilling, who transformed Enron from a traditional pipeline company into the energy giant that lived and died by the free market, as a visionary who bragged that his “new business model” was too complex for even the boss to grasp:

In private moments, the speed at which Skilling had achieved his success surprised even him. Riding in one of his corporate jets, he’d peer out over the clouds and say to no one in particular, “Who would have believed it?”—that in four short years he had built a financial powerhouse. “Do you think Ken understands what we do at all?” he’d ask. “Do you think he gets it?” No one would answer, but everyone would smile encouragingly, so Skilling would answer the question himself.

“Naaaaah,” he’d say. “I don’t think he gets it.”

But Skilling had revealed that he recognized Enron’s fallibility. Once, he and then-vice chairman Cliff Baxter were quizzing Watkins on the demise of her former employer, MG Trade Finance Corporation, a company she had worked for between her stints at Andersen and Enron. MG was one of Enron’s chief competitors in the world of finance, according to Watkins, and the two men were concerned that its failure would reflect poorly on Enron:

Sherron was nonplussed. In her mind, Enron and MG had nothing in common. She told Skilling that MG’s collapse was not exactly as reported in the press. Trading had been a problem, but the deeper issue had been on the balance sheet. The traders placed huge bets to try to gamble the company out of trouble. The problems at MG, she said, were caused by “desperate moves by desperate people.”

Skilling grimaced impatiently. “That’s not a good answer,” he said, his eyes locked on Sherron’s. “We could become desperate one day.” The words hung in the air: Enron? Desperate? It was as if Skilling knew something she didn’t, about the company, or, maybe, about himself.

Watkins’ discovery of massive accounting fraud did not occur until 2001, when she was once again assigned to work under Andy Fastow. As described in Power Failure, Watkins made her discovery by taking a simple inventory, working with an Excel spreadsheet to determine which of the division’s assets were profitable and which were not. She soon stumbled across an entity called the Raptors: off-the-books partnerships in which Enron had hidden hundreds of millions of dollars in losses, borrowing money from the Raptors and promising to pay it back with company stock. The Raptors income-statement manipulation amounted to nothing less than an effort to deceive Wall Street about Enron’s financial health. Watkins’ first instinct was self-preservation; she decided to look for another job and report her findings to Skilling on her last day. But Skilling was one step ahead of her. On August 14, 2001, he resigned as CEO, saying that he wanted to spend more time with his family:

The day after Jeff Skilling resigned, Sherron Watkins decided to make things right. She sat down in front of her computer and started composing a letter.

Dear Mr. Lay,

Has Enron become a risky place to work? For those of us who didn’t get rich over the last few years, can we afford to stay?. . .

Sherron was not a pessimist. She believed that the people in charge at Enron would be grateful to her for pointing out a problem and suggesting solutions. She wasn’t going to the press. She wasn’t going to the government. She was going to go through channels, and display her loyalty to the company.

Watkins saw herself not as a whistle-blower but as a company loyalist. That interpretation is challenged in Robert Bryce’s book, Pipe Dreams: Greed, Ego, and the Death of Enron, which casts her as an opportunist intent on currying favor with Lay to move up the corporate ladder. Bryce’s argument ignores history: Bearers of bad news seldom gain from telling the truth. Indeed, instead of earning her a promotion, Watkins’ letter and subsequent conversation with Lay imperiled her standing enough that Lay looked into firing her. Watkins did profit from her research (though minimally compared with other Enron executives); she sold Enron stock options worth $17,000 shortly after talking to Lay.

Although her decision not to report the company’s accounting irregularities to federal authorities may seem wrong in hindsight, she was convinced at the time that she was doing the right thing. “I thought that going to the SEC [Securities Exchange Commission] or the press would kill us,” Watkins said. “If a company confesses its faults, it can’t be exposed. But if you’re exposed, you surely die. Remember, there were twenty thousand Enron employees whose jobs were at stake. I thought we had only one course of action that could save us, which was to restate our financial statements and to come clean. I had no idea that we had so much debt—there was actually twenty-five billion dollars in off-balance sheet debt, not the thirteen billion dollars we showed. I didn’t know the extent to which we really had been failing for a couple of years. At the time, I didn’t understand that for Lay and the board to come clean, they would have had to resign. All these things had happened on their watch. So I was asking them to fall on their swords, which they weren’t going to do.”

Congressional investigators leaked her letter to the press on January 14, 2002, and Watkins was soon besieged by TV crews that camped out on her front lawn. The first person she called was Cliff Baxter. She had mentioned Baxter in her letter, and she wanted to alert him that the media might be headed his way. At the time, Watkins did not know the depths of Baxter’s depression over the Enron scandal. Twelve days later he would commit suicide. Their conversation, related in Power Failure, hinted at the tragedy to come:

She told him of the leak and read him what she had written: “Cliff Baxter complained mightily to Skilling and to all who would listen about the inappropriateness of our transactions with [the off-balance sheet partnership] LJM.”

Baxter softened. She was correct, he said. He had complained to Skilling. It didn’t look right for a company of Enron’s stature to do business with its CFO’s partnership.

“You did all you could do,” Sherron told him. “You were one of the few good guys in all this mess.”

Baxter sighed, and a defeated tone crept into his voice. “I don’t think this will turn out ‘good’ for any of us,” he said.

AS WATKINS DROVE BACK TO the city, negotiating the rush-hour traffic along I-45, the Houston skyline came into view. The rain had slowed, and the late afternoon sun was beginning to edge out from behind the clouds. Watkins offered to drive by the Enron Towers, and as she headed toward downtown, she reeled off the many reasons she had loved working at Enron. (She still has not shed the habit of referring to her former employer in the first-person plural; it is not “the company” but “we” and “us.”) Enron, she said, had been an electric place to work, limited only by what its employees could imagine. During her nine years there, she had traveled the world: Hong Kong, the Philippines, Peru, Chile, Panama, South Africa. In those days, she had believed that she was doing good, bringing energy to the people who needed it most. This Enron, the nostalgic Enron of the past, was the one she wanted to remember.

As she neared the two towers, she drove down Louisiana Street, past the closed Enron child care center. The playground was empty and padlocked, its swings stirred only by the wind. Watkins parked her car, and we studied the two skyscrapers above us. In the sunset’s hazy pinks and oranges, the towers looked like monuments to a prouder time, reaching relentlessly upward. The curved skyway bridging them was vacant; most of the lights were out. “It’s sad,” Watkins said, after a long pause. “I’m glad to be out of there. What’s left now is the worst part of the culture and none of the fun. It’s people fighting over liquidation bonuses and who gets credit for selling what assets. Bankruptcy lawyers are picking everything off the carcasses, and there will be nothing left for creditors. It’s just wretched.”

Watkins traced the outline of the towers upward, until her gaze reached the sky. “It could have been so perfect,” she said. “Gone.”