Lets say that the CoC actually does become Sheogorath. It's entirely plausible for Bethesda to say that the new Sheo takes on all of the old's traits, including the preference for appearing as a friendly old gentleman with a questionable scottish accent. TES V comes along, and you would still be able to visit Sheo's shrine without feeling cheated because its in the image of Sheogorath they've always had.
Now, lets say the CoC actually just goes crazy. It's equally plausible that Sheogorath granted them the powers you gain in the Isles merely as a way to make the illusion convincing. It's not like any of the abilities you use in Cyrodil are entirely unheard of for an accomplished spellcaster to have mastered.
I've got to say though, it never even occured to me that the CoC was just nuts (well, nuttier than they already were for being a divine crusader and a dread agent of Sithis, but thats beside the point). Next game I start up I'm totally gonna assume it was all just an elaborate plot to make the CoC insane :thumbsup: