Every decade or so comes a technology that is so new, comprehensive, interesting, and damn useful, that it completely changes the way that we have fun and do business. Think commercial air travel, the mobile phone and the internet; these were all, what management experts like to call ‘disruptive technologies’, because they forced established businesses to change the way they operated.
Now, another of these technologies-come-zeitgeists is on the way virtual worlds such as Second Life, Whyville and ActiveWorlds. The most popular of these Second Life ‘is a disruptive technology on the level of the personal computer or the internet’ according to celebrated hi-tech guru Mitch Kapor, founder of Lotus 1-2-3.
Woah. So that’s impressive. But what’s it got to do with accountants? Well in the future, says Arlene Ciroula, partner at Maryland accountancy firm Katz, Abosch, Windesheim, Gershman & Freedmans (KAWG&F), a hell of a lot. There will be riches made on virtual worlds and accountants will need to count the cash.
Ciroula really is the best person to ask. Her firm was the first accounting practice to set up in Second Life. Accountancy Age sent reporter avatar Belinda Blessed to check out KAWG&F’s virtual office, and it looked impressive a virtual world away from its real-life Baltimore base.
In Second Life, the firm is based on CPA Island (Certified Public Accountant), with plush glass-fronted beachfront offices perched on stone pillars to improve the view. There is a mountain to the north and a small jetty to the south, where the virtual speedboat is moored. In front of the offices are two virtual Porsches.
To access the office, Blessed flew into the first floor reception (because you can do that in Second Life). Inside, the leopard skin rug, giant aquarium, Chinese dragon wall hanging and leather armchairs and the stripped pine recall the offices of Blowfeld in James Bond. On the front desk is a flat-screen monitor set to KAWG&F’s home page, so if no accountant avatar is online and available though the chat facility, a cursor click or avatar touch to the virtual screen pops up the firm’s homepage virtual marketing within virtual marketing.
Back on planet Earth, the firm has received plaudits from the Maryland Chamber of Commerce for its initiative. It praised Ciroula for her ‘diligence in making the firm the first certified public accounting firm to host an office in Second Life, a virtual world where a record number of seven million residents can conduct business just as they do in real life’.
Virtual dollars
Second Life is accessed via the internet and provides a host of ways that customers can spend virtual dollars. Members can trade services to other members, which are bought and sold with ‘Linden dollars’, the virtual world’s currency, named after its creator and online host San Francisco-based Linden Lab. Its dollars can be bought via the system’s online exchange at a rate of around LL$265 for US$1.
Services available include selling customised digital clothing for avatars, setting up and furnishing virtual buildings, selling programmes enabling an avatar to dance, drive or even have sex. The most profitable of these is usually virtual property development, which has been the source of some serious earnings.
Take Anshe Chung, an avatar created by German user Ailin Graef — he became SL’s first $ millionaire last year, making money from several virtual shopping malls, virtual store chains, virtual brands and investments in Second Life’s virtual stock market. Other virtual world development companies doing well include US-based The Electric Sheep Company and UK-based Rivers Run Red Ltd.
Ciroula says: ‘It’s an invention that’s going to change our lives in four to five years time. Virtual world technology is here to stay.’ A look at SL’s supporting website gives the statistics of healthy business activity on the system see here .
But, at present, while it shows a handful of people are making serious money on Second Life, many more are making small sums. ‘Many businesses are selling virtual hair for a few dollars, and they would have to sell an awful lot of hair to be able to afford professional accounting services,’ Ciroula says.
Partly as a result, KAWG&F has not taken up any accounting offers from SL-based companies, with another problem being a lack of regulation of Second Life stock exchanges where capital is often raised for some major virtual projects.
But these rules will come. ‘Second Life has grown very fast,’ she says, and is still being adapted. The real killer application of virtual worlds, akin to Google’s dominance of the search engine market, has yet to emerge.
Meanwhile, her company is getting acquainted with a business model she is sure will eventually be a huge success. ‘Compared to today’s internet, this has more emotional broadband,’ she stresses - citing hotel companies that are setting up virtual hotels online, so potential customers can walk around the rooms. Also KAWG&F has been using its funky Second Life presence to attract America’s brightest and best young accountants to apply for its jobs.
This is also a benefit for the first European accounting firm to set up a presence on Second Life the Netherlands’ Berk, an affiliate of Baker Tilly International. Managing partner Hans Koning says his firm uses its virtual office to recruit young accountants, with a virtual weblink offering visiting avatars the chance to make an appointment with a Berk accountant.
‘They could then ask what it was like working with Berk and how they could make a job application,’ says Koning. Setting up a Second Life office also scored Berk buckets of press coverage, stresses the managing partner.
Other Second Life users have been accounting schools, with the virtual world offering students a chance to practise their new skills without messing up real-life books.
For instance, the University of Central Florida has set up a 3D interactive accounting model, which, says a note from lecturer Dr Steven Hornik, ‘allows students to visualise the equality of assets, liabilities and equity’. He says student avatars ‘can interact with the model directly via chat or by writing a transaction on a notecard which is read by the accounting model’. The teaching tool helps promote understanding of key accounting principles and also encourages motivation and interest in the subject, he stresses.
The growth of virtual trade within Second Life has also sparked the development of accounting software solutions for the virtual world. Iron Perth Products for example has created the ‘Free Transaction’ programme. This allows Second Life businesses ‘to manage, query, and visualise Second Life Linden dollar transactions’.
Another example is US-based Code4Software’s Second Life financial analysis package called V-Tracker, which number crunches numbers of avatar visits to a Second Life business, the average time per visits and other detailed statistics.
And, yes, Second Life accounting firms that work with SL businesses do now exist. In May, France-based SL-account was launched, saying its aim was ‘to help entrepreneurs in SL to get a better overview of their accounts’. It aims to overcome a current weakness of Second Life, that users’ transaction histories are limited to 30 days. SL-account’s software ‘gives you the opportunity to store all your XML files that you upload to SL-account for an unlimited period of time,’ a company statement says.
It adds: ‘You can then use a wide range of tools available through SL-account to analyse your transactions.’
A taxing new world
Accountants aren't the only ones to try their luck in a virtual business wor ld. Following fashion designer Stella McCartney's anti- fur animal rights protest in Second Life earlier this year, Giorgio Armani last month opened his first shop in cyberspace. Visitors to the Second Life Armani store, an exact replica of the Armani boutique on Milan's Via Manzoni, will be able to buy Armani virtually with Second Life currency Linden dollars, or click through to the Emporio Armani website where they can shop for real.
But what about the tax implications of trading in Second Life? A joint economic committee of the US Congress has been investigating the issue over the past year with its findings due to be published very soon. At the same time, UK-based tax advisers have urged the Treasury to take the lead in considering the tax implications of revenues generated in the virtual world.
Experts have already suggested that Second Life could be used as a way to avoid tax and cover up fraud. They also warn that dragging virtual businesses into the tax net won't be easy. For example, do you tax residents of a virtual world in that virtual world or after they have converted their money to recognised currencies? And if HMRC taxed virtual profits, wouldn't it have to accept payment in linden dollars. Then there is the question of whether virtual wealth forms part of an estate for inheritance tax purposes. Is VAT really payable on goods that only actually exist on a computer?
