Elizabeth Krentzman is a lawyer, not a CPA. She’s worked 11 out of the last 14 years at Deloitte, always on the consulting side of the house. But now auditors are reporting to her.

That’s because this month she got a new job leading Deloitte’s U.S. mutual fund industry practice. She oversees the auditors as well as the tax, financial advisory and consulting staff who serve that industry. This set-up boldly disregards the spirit, if not the letter, of the auditor independence rules. How can Krentzman fulfill her business-development mission and at the same time make sure Deloitte audit partners aren’t cross-selling advisory services to audit clients, or that compensation programs don’t incentivize prohibited behaviors?

Nine years after the passage of the Sarbanes-Oxley Act, such conflicts are once again all too common. After the law curtailed their ability to cross-sell advisory services to audit clients, the other three of the Big Four global firms sold their consulting arms. Today, audit revenues are flat; Sarb-Ox’s stiffer accounting requirements fattened fees, but since then the economic downturn has kept fees from growing. So the Big Four are all counting on consulting again to save partner payouts.

Deloitte, the largest public accounting firm in the world, has a head start in this race, since it alone kept its side businesses after Sarb-Ox. Its rivals Ernst & Young, PricewaterhouseCoopers, and KPMG have had to reinvent the wheel, rebuilding their advisory arms using strategic acquisitions and “catalyst” hires. Deloitte is also anxious to regain its footing in financial services. It lost some big audit clients during the crisis -- Bear Stearns, Washington Mutual, and Merrill Lynch -- and kept a few that arguably maybe it shouldnt have.

Hence Deloitte’s recent pitch to mutual funds: “Opportunities and challenges addressed from every angle — accounting, assurance and advisory, risk, tax, strategy, financial, technology and human capital. Global, integrated solutions.”

Mutual funds could certainly use some advice: The Securities and Exchange Commission is taking a hard look at their use of derivatives. And Deloitte is careful to note that it doesn’t offer advisory services to audit clients. The firm audits five of the top 20 U.S. mutual fund complexes and provides advisory services to the other 15. 

The problem is that global accounting firms haven’t been drawing lines between audit services and everything else all that strictly. Jim Doty, Chairman of the Public Company Accounting Oversight Board, said in June that the regulator’s reviews of partner evaluation and compensation process found “examples of seemingly unrestrained enthusiasm … for selling services to audit clients.” 

Deloitte, in particular, is not very good at keeping its partners in line. In August of 2010, the SEC settled charges of insider trading against Thomas Flanagan, a Deloitte Vice Chairman, and his son. Flanagan traded in the shares of at least twelve Deloitte audit clients, seven of which he was acting as a client service partner. Those audit clients, which included Walgreens, Berkshire Hathaway, Sears Holdings and Best Buy, were required to conduct an independent investigation of the matter and assess whether Deloitte’s independence as an auditor had been impaired. Impairment would have necessitated a costly and time consuming change in audit firms.

In spite of being accused of performingno audit at all at Bear Stearns, Deloitte will probably never be formally accused of an independence violation when it uses the audit relationship to get a bigger “piece of the wallet.” The firm has a ready-made template for claiming it’s been duped when partners don’t comply with its policies and procedures. Flanagan wasn’t the firm’s first insider trading scandal at a high level and he was not the last one at Deloitte or the only one from the Big Four or a consulting firm recently.

With her background, Krentzman knows exactly what to expect should regulators start asking questions. Most recently, she was the general counsel for the mutual fund industry’s trade association, the Investment Company Institute. Earlier she worked for the SEC’s Division of Investment Management. She led its Office of Disclosure and Investment Adviser Regulation from 1991 to 1997. She currently serves on the advisory board of the SEC Historical Society.

Deloitte has a good chance of avoiding sanctions for mixing audit and consulting when serving mutual funds, because it’s chosen someone like Krentzman to do it. 

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. 

Editor's note: Accountable is a new column about corporate governance, risk management and the professional services firms and their impact on financial institutions.