The media gossip site Gawker jumped into the deep end of the pool Aug. 23rd when it cannonballed 950 pages of private, but not quite, Bain and Mitt Romney-related documents on its readers. The instructions were, "Go at it."

Gawker's goal is to find out whether Romney, a presidential candidate who has made zillions in private equity, has avoided or evaded paying taxes. The documents, which include several annual reports that included an auditor's opinion signed by the Boston office of PricewaterhouseCoopers LLP, point to a significant relationship between Bain and PwC.

Auditor-client relationships, particularly how independent the auditors really are, have been flashing bright red on the industry's radar screen since the Madoff Ponzi scheme. Regulatory lapses uncovered in the Madoff case forced the Securities and Exchange Commission to tighten oversight of broker-dealers and investment advisors. Madoff's firm had played all roles – broker-dealer, discretionary investment advisor and custodian – and that allowed investors to be cheated. Bain is also an investment advisor to its own private funds.

The SEC requires registration of investment advisors and broker-dealers and works with regulatory organizations like Finra and the Commodity Futures Trading Commission to monitor them. Auditors of broker-dealers must register with the Public Company Accounting Oversight Board, the public company auditing regulator, and must be inspected. The PCAOB recently issued its first inspection report on broker-dealer auditors, 10 of them, and found material discrepancies in all 23 of the audits reviewed. In particular, the PCAOB found violations of auditor independence requirements. Broker-dealer auditors must be independent of their clients per SEC rules and are not allowed to prepare the broker-dealer's financial statements.

As of March of 2010, investment advisors like Bain Capital Partners that have custody of customer funds and securities must hire an "independent" auditor to do a "surprise" examination. The auditor that performs the "surprise" examination must be registered with the PCAOB and subject to its inspections. The PCAOB, however, has no authority to review the "surprise" examination. And an investment advisor is not obligated to have a full audit by an independent auditor.

Private-equity firms are by definition private, but it's a tenuous kind of privacy. Even though the Bain private funds are exempt from reporting to the SEC, reports are sent to investors. They can easily end up in the public domain. A detailed analysis of the documents and their investments has yielded a few juicy nuggets. For example, Romney, a strict Mormon, is invested in funds that hold shares in casinos and other "sinful" businesses. And some tax strategies employed by the funds may be tax evasion, not just tax avoidance, according to Professor Victor Fleischer.

The fund documents may lead you to believe PwC also audits Bain Capital Partners and the rest of the Bain investment advisors. PwC does prepare the personal tax returns of all Bain partners, according to Dan Primack of Fortune. But PwC is not an "independent" auditor for the investment advisors. Non-audit services such as M&A and personal tax return preparation for partners with financial reporting responsibility would be prohibited, per SEC and PCAOB rules, if PwC was the "independent" auditor.

PwC audits the Bain funds in line with private company American Institute of Certified Public Accountants standards. AICPA independence rules prohibit auditors from having a financial relationship with clients but are more generous than are the SEC independence rules about the kinds of services an auditor can provide. PwC stays away from the audit activities that would require SEC level independence because PwC probably prefers to be Bain's full-service provider.

After the publication of the Gawker documents, Bain's spokesperson issued this statement: "Our fund financials are routinely prepared by auditors and demonstrate a commitment to transparency with our investors and regulators, and compliance with all laws." One blogger, who was under the impression that PwC was Bain's independent auditor, thought the spokesperson must be mistaken because an auditor can't prepare financial statements. However, PwC probably does prepare the funds' financial statements and then "audits" them. PwC also probably prepares tax returns for the funds and affiliated firms and reports on third-party custodians.

Bain selected a small Boston audit firm, Edelstein & Co., to do the first "surprise" examination of funds and securities, since go-to firm PwC is not "independent." Edelstein is registered with the PCAOB as of late 2009, and has issued one audit report for a broker-dealer client, but PCAOB has not posted an inspection report for the firm yet. The PCAOB has no authority to review the "surprise" examination when Edelstein & Co. is inspected.

Investment advisors are still too casually audited and loosely monitored by regulators. I say "caveat emptor" to the Bain investors and other private equity and venture capital fund investors who depend on these investment advisors.

Bain spokesman Alex Stanton declined to comment. A PwC spokesperson did not respond to my request for comment by the time of publication.

Francine McKenna writes the blog re: The Auditors, about the Big Four accounting firms. She worked in consulting, professional services, accounting and financial management for more than 25 years.