HOUSTON (CNNMoney.com) - Enron's most prominent whistle blower Sherron Watkins took the stand Wednesday and described a company that increasingly became mired in accounting fraud in 2001, prompting her to send an anonymous letter to Enron founder Kenneth Lay in August warning him that the company "had a hole in the ship and we're going to sink."

Watkins, a former vice president at Enron, testified that in mid-2001 she began investigating Enron's relationship with LJM (a special purpose entity designed to take high-risk poor-performing assets off Enron's balance sheet) and was increasingly alarmed as it became apparent that the relationship didn't stand up to accounting scrutiny.

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She said she stepped up her own efforts to leave the company by August, on concerns about "working for a company that manipulates their financial statements" but was taken aback by the sudden departure of then-CEO Jeffrey Skilling.

"I thought he's a smart man," Watkins recalled. "He knows it's bad and he's getting out."

During cross-examination from Skilling attorney Ron Woods late afternoon, she admitted that she had never spoken to Skilling about his job and couldn't attest to why he left the company.

But she told jurors that Skilling's sudden resignation, while shocking, confirmed her fears that the accounting irregularities she had uncovered were "the tip of the iceberg."

Watkins said she sent Lay a detailed memo the day after Skilling's resignation was announced but kept it anonymous until after the company's all-employee meeting on Aug. 16.

According to the memo, shown by the government, Watkins outlined the "oddities" related to LJM's Raptors transactions -- a series of special financing vehicles used as a hedging tool -- in which LJM had profited from the investment but retained no risk.

She said the structuring of the deals didn't imply a true third-party sale and warned Lay that the aggressive accounting would come back and haunt the company.

She went on to predict that Enron "will implode in a wave of accounting scandals."

Known as a straight-talker with a feisty streak, Watkins and Lay's defense attorney Chip Lewis butted heads frequently throughout the afternoon cross-examination.

Lewis attempted to show that Lay had been responsive and taken action regarding all of the concerns Watkins had relayed during the meeting. Watkins testified in the morning that she met with Lay and provided him with a seven-page memo containing the documents she had collected from various business units that showed the company had been engaged in shady dealings.

"If Raptors goes bankrupt, LJM is not affected," Watkins, a certified public accountant, told Lay at the meeting. "They have no skin in the game," adding that Enron would be liable for millions of dollars in losses.

In the seven-page document provided to the jury, Watkins laid out her concerns and warned Lay that others within the company were also raising concerns about Enron's accounting. She said one manager told her, "I know it would be devastating but I wish we would get caught. We're such a crooked company."

Watkins testified that Lay winced at that statement during the meeting but seemed unperturbed by the other issues, even when she informed him that there was talk of special "handshake deals" between Skilling and former financial chief Andrew Fastow, who also ran LJM.

During cross-examination, Watkins said she believed at the time that Lay had taken her concerns seriously. She said that he promised to launch an internal investigation into the matter even though he was skeptical that there was anything improper with Enron's transactions because they had been signed off on by lawyers, accounting firm Arthur Andersen and the board of directors – a point defense attorney Lewis indicated as an example of Lay's receptiveness towards her concerns.

But Watkins countered that Lay continued to rely on the very law firm of Vinson & Elkins as well as the accountants at Arthur Andersen to revisit the questionable deals that they had originally approved, despite her objections to their presence in the investigation.

When Lewis suggested that Lay couldn't hire another accounting firm at the time without the approval of the board of director's audit committee, Watkins jumped forward in her seat and vehemently declared "that is totally untrue," adding that the restriction only implied to issues of auditing, not an investigation. She said that Enron executives had used PricewaterhouseCoopers on a number of occasions for other matters.

Lewis and Watkins also sparred on Enron's decision in the third quarter of 2001 to unwind its Raptors transactions and take a one-time write-off. Lewis pointed to a memo in which Watkins appeared to suggest unwinding the transaction and indicated that Lay had taken her suggestion to heart.

But Watkins became animated and insisted that further in the memo she had explained why Lay should restate Enron's prior earnings to reflect that Raptor's was an improper financial deal and come clean to investors before they started asking tough questions.

"I was trying to get Lay to restate," she said. "I thought it was our only chance of survival."

Under direct examination, Watkins told the jury that she found out months after her meeting with Lay, that he sent a memo to Vinson & Elkins to determine how he could fire her without risk to the company.

"I felt nauseous," she said, adding that she had gone to Lay with her concerns because she believed that he wouldn't "dump me on the street."

Watkins testified that the atmosphere in Enron became increasingly tense towards her after she raised her concerns as she was bounced around from department to department and was told that Fastow wanted her fired and asked to seize her computer. She also raised concerns that Fastow was "vindictive" and she feared for her personal safety as well as her family.

But the defense tried to portray Watkins as a trouble-maker within Enron that received criticism on her employee evaluation for being overly aggressive and prone to miscommunication that resulted in problems. Lewis also attempted to discredit her desire to leave the company, providing the jury with e-mails in which she requested various positions at Enron, including one on its crisis management team in which she asked to be in charge of defending the corporate accounting against shareholder lawsuits.

Defense attorneys have maintained that there was no crime committed at Enron, other than the misdeeds of Fastow and a handful of cohorts.

Earlier Wednesday morning, defense attorneys cross-examined former Enron managing director Vince Kaminski, who raised objections in 1999 over the creation of the LJM partnerships, saying they presented too many concerns regarding conflict-of-interest and credit instability.

Lay's defense attorney Bruce Collins attempted to downplay Kaminski's objections to LJM, saying his accounting concerns were outside the scope of his expertise.

While Kaminski admitted that he wasn't an accounting expert, he said he had "a duty to act to the best of my abilities and address my concerns."

Presiding Judge Sim Lake held the jury late Wednesday in order to wrap up Watkins' testimony. There will be no session held on Thursday as the prosecution prepares its next line of witnesses.

The judge told the jury that he expects the Enron trial to be completed by the end of April.

Enron was once the seventh largest corporation in the U.S. It declared bankruptcy in December 2001, costing thousands of employees their jobs and resulting in millions of dollars in losses for investors.

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