Focus: virtual accountants

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?