Accounting?

Would SL's economy develop better if there were accounting and auditing of major firms like in RL?

I think it would help create confidence in groups like Ginko or firms listed on the SLEX if they released finacial statements so that people could actually know what they are investing in.


Just a thought.

Well, Ginko has stated they will not provide details as to who they are or what they are investing in.

I talk a lot about his here, though:

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I agree. How would you propose to make this a reality?

Ginko was more an example of where disclosure and the breakdown of assymetric information might be good business sense... anyways....

In RL in the US, the state governments certify accountants and accounting firms which then certify the internal accounting and finacial statements produced by a firm. In SL, obviously we have no real government. So we can't have certified public accountants and what not. I see a couple of ways around this. First, if an accounting firm was created in SL that proved to be reliable and accurate, then that firm could serve to create and certify finacial statements. A firm could then use the accounting firm to either handle the internal accounting and statement preparation or just prepare the statements. A second idea would be to form a business guild or trade organization which could provide accounting skills to its members in return for a fee. Those are just a few ideas off of the top of my head :: shrugs:::

For starters, you need a way to deliver data on financial transactions to a third party in a form that cannot possibly be altered by the firm being audited.

Since Lindens cannot even deliver a spreadsheet of the pitiful amount of data they offer to owners, this is already a tall order.

Isn't there some sort of notary service available or in development that offers nonrepudiation and verification?

I believe there is such a service.

But I believe what they do is accept any document, e.g. a notecard, and then by computing some kind of encoding, they will be able to prove at some future date, that a document you present is exactly the same document that you presented earlier. So for example, if I put in writing a statement that I agree to sell you a certain parcel of land in six months for L$2000, I will not in the future be able to deny that I had offered such a document to be notarized.

This is a useful service for authenticating statements that I make, but it cannot prove that such statements are true. It cannot prove, for example, that during the month of October, 2005 (say) my business earned L$12,123 in sales, and spent L$321 on textures. And the only way anybody can KNOW that this statement is true is to look at the accounts generated by the Lindens. And at this moment, the only person who can see these accounts is me. So there is no way for me to prove to an auditor such sales and expense data, except to give the auditor my password and let him or her log in under my account and look at the records. Few of us would be comfortable with this.

The Lindens advertise that these accounts can be downloaded in spreadsheet form from the secondlife website, but this feature does not work. And, even if it did work, I cannot prove that the spreadsheet I give you is the same as the spreadsheet I downloaded.

We would be needed is the ability to tell the Lindens: "Download my accounts and send them (by email or some other way) to the accounting firm of Phred Phunnybucks." Then Phred would receive the data directly from the Lindens, without any possible intervention on my part, and if you trust Phred, then you will trust his conclusions about my business.

Ahhh I understand your point now. So theoretically we would need a way for the auditor to be able to view the particular firm's activities. The only other possible way would be for you to provide the information to the auditor provided the auditor trusts you (I hope!). Hmm, so how can we resolve this roadblock?

First, I think we need to get the Linden's to provide us with better tools for recordkeeping. We need to formulate a specific proposal for what data we want collected, how long we want it preserved, and the manner in which we can gain access to it and share with others. If a group of SL business people could come together on a single set of requirements that weren't too complicated to implement, I think we could probably get something done someday.

Second, we need to find out if there are any citizens who would be willing and qualified to provide accounting services at a price we could afford. I can't imagine why anybody who does this sort of thing for a living would also want to do it "for fun." I think we will need to pay something closer to RL fees for such services.

Third we need to find out if any of us would then make use of these services.

From my own perspective, I would hire someone each year to audit an annual earnings statement for my business, against the eventuality that someday I might decide to sell my business and retire from SL. Earnings statements that prospective buyers would trust would help establish a fair price.

That being said, given that many things that get started on these forums end up as pissing matches, I'm going to wait and see what other kinds of responses you get to this thread before I commit to spending any more time on it.

Informal audits are possible.

One could audit a land baron fairly easily, seeing land, a percentage of occupancy and rental rates firsthand, without too much trouble.


For 'content providers' selling virtual objects, it gets a lot harder but a general sense is still possible.

Say the fellow has a 2048m shop and legitimate traffic over 1000 (no camping chairs), and I assure you he could easily make tier payments unless he practically gave everything away.

Like Warren Buffett says, don't invest in stocks, invest in companies.

And to do that, you need more than a beancounter's audit anyway.

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How about using SL only as a "display window" and conduct the actual transactions on your own website? That would give you 100% control on all necessary informations about your business.

since it's impossible to get that kind of information from SL, anyone who want to conduct any kind of serious business HAS to do it on a separate website, where all transactions can be recorded and submitted for audit. Cut out the third party (LL). Just like any RL website.

At least, when you see a dubious website, you get the choice of not doing business there. But the owner has the possibility to be up front about the info and able to get credibility by submitting to audits...

Many here speak of impossibilities, but the first hurdle is demand.

Several virtual financial service enterprises have been created in SL. Other contributors have named some, and their success is attracting competition. Some, for example, borrow money in exchange for promises to pay interest and return the principal on demand. Despite the absence of disclosed assets or liabilities, the absence of an ability to enforce contracts, the absence of audited financials and a wide spread outcry about the risks undertaken by those who lend money to these enterprises, they appear to do a thriving business.

We seem to be in the stage of social development that preceded government involvement in business organizations larger than partnerships of mutual trust. A student of economic history will recall that economic development was marked by financial "bubbles," such as the tulip craze, South Seas bubble, Teapot Dome and the events leading to the Great Crash of 1929. Much of that "boom and bust" phenomenon was the result of the lack of regulation, disclosure and audited financials.

From the public's awareness of those events came legislation requiring disclosures, audits and government examinations. Yet, RL still sees scams, of which the Enron scandal is just a recent example.

And yet, RL people continue to be daily taken in by the same confidence schemes and "get rich quick" pitches that have worked in various cloaks for thousands of years. Such is life, both Real and Second.

I suspect that just as in RL, it will require some well-publicized scandals and collapses for folks in general to become more skeptical about accepting promises for future performance from SL organizations that do not make disclosures and allow some verification by trusted third parties. As that demand develops, I suspect that we will see the emergence of processes and protocols for meeting that need.

Until then, until that demand for more transparency and accountability, the realm offers a fascinating opportunity for social science scholars to study a world "before the fall" and to watch the reactions when it comes in various sectors of the society and SL economy.

Frank

A couple thoughts,

First, could a box be scripted such that it would record a users trading activities and then send them to the auditor with some type of hashing to ensure that the data is unchanged?

Second, as for demand, while it is true that businesses in SL will probably continue to thrive with or without information disclosure, my suscipion is that the economy will grow faster if these type of assurances are in place. For instance, as it stands I consider the risk associated with investing in Ginko to be too high to invest in despite the huge payoff as I am (like most people) risk adverse. However if I had finacial statements which demonstrated that Ginko was bringing in enough money in investment income to cover its stated interest rate, I would be much more comfortable with investing, thus growing the economy.

Jonathon, I agree that the economy might grow faster if what you suggest were in place.

The first life economy would grow faster if people did not ruin their health and finances with smoking, crack, junk food and compulsive gambling. But in an economy based on supply and demand, if there is a consumer demand for a product or service, someone will supply it. If there is not, it will be hard or impossible to find.

In a centrally planned economy (e.g. Stalinist USSR), planners decide what is "good for" the economy, ignoring consumer demand. We've seen how poorly that worked.

So, when enough people demand audited financials, a market to supply it will appear. And those who want it better be prepared to pay for it. Auditing is dull, long, skilled work that people do not do as a "game." They do it for pay. And it may be that auditing costs more than just assuming the risk that one of your investment is run by crooks or incompetents, and not putting all your eggs in that one basket.

- it's true that ginko could distribute a very pretty prospectus, but unless there were investments in publicly traded instruments, it might as well be swiss cheese for all you would know whether the numbers were real or not. I could Quark up a really professional document about how i put $1 into my uncle's hot dog stand and now it's delivering me $1000 a day!

- the only current method to "open your books" is to let someone log into your account and data dump your inbounds and outbounds. Any other method would have to be a new feature implemented by linden lab (for example, allowing you to give someone "activity history" access to your account, but not able to do anything else.

- given that SL right now is largely small biz and sole proprietorship-type businesses, there is little current need for auditing. While there is some M&A activity in SL, it seems pretty minor right now, not surprisingly given the size of the market.

- if LL gives us role-based group management tools so business owners can control who gets to do what with money, objects, and land, we'll see more businesses. With larger businesses might come exit strategies and exit strategies will increase the pressure for some sort of trustworthy financial auditing service.

Well Said. If LL truly wants SL to function as a seeding ground for the growth of real virtual businesses they MUST provide us more business group functions. It is damn near impossable for any resident to build the proper systems to run a business ina true business like manner given the current tool set.

And I think people would build business functions but they don't want to be GOMmed.

true enough. it's a natural thing to embed into the underlying system

This is somewhat of an aside, but I feel it is something that should be addressed within the scope of this conversation anyhow.

What you say is very true. Something we have been dealing with constantly at SL Exchange are the technical hurdles involved in delegating tasks in-world to staff while maintaining security and integrity. This includes functions that should be simple, such as the ability to rez items on behalf of someone else or really do any type of asset management without also being given full access to the company bank account and intellectual property. I'm sure most everyone here is aware of the various "oopses" IGE has had with employees accidentally paying someone 1 or 10 million L$ too much.

I think we would all be a lot better off if LL assigned one developer to enhancing the power and flexibility of the collaborative aspect of Second Life. I have the feeling that they do not keep in mind that it isn't just a platform, but it is also a virtual world and as such in order to continue to drive innovation (more precisely, allow its customers to continue to drive innovation) it has to elegantly mimic some rather mundane concepts that we take for granted in RL, but which are completely alien concepts within the Second Life environment.

These are not fun projects, but as a veteran software developer I know all too well that the most mundane and time-consuming development projects are usually the ones that create more benefits than the fun stuff. In fact, such value-added functionality could even come with a price tag for "premium" service and it could easily become an extra source of significant revenue for Linden Lab. I know of many current companies/merchants/entrepreneurs including myself who would jump at this regardless of the cost.

In my personal opinion, unfortunately I do not have much hope that this will come to be unless we get some major companies who start doing business in SL and demand it for themselves.

Even though I don't work for Ginko anymore, though I still ahve nothing against them ymself, just a personal reason that I quit, you have no idea how much of a bad thing it would be to bring things liek this into SL and games, if you want that, expect pretty soon to be taxed on your lindens.

Absolutely agree.

Heh, I'd even settle for a 'business income / businesses expenses' breakout or two, without resorting to multiple avatars or whatever.

Just a couple quick responses,

In reference to demand, I think that the demand is already there for accounting like instruments. Consider the uproar over Ginko. Nor do I advocate any implemenation of such a system except from the market, in other words, I think any top down implementation from a goverment like body will fail. And so I don't forsee taxes or any other bullywhack being instituted. Investors will demand for more reliable! and accurate! information from the investees, which will drive the growth of accounting.

Yes, accounting is a boring boring field. At the same time, the rules in sl do not need to be nowhere near as complicated as rl, and so the price of those skills will be somewhat lower.

Sorry I didn't notice this thread earlier....

I'm the creator of Nota Bene, the notary in SL. Indeed, the description of it at the start of this thread is pretty accurate. You bring a notecard to the notary, and sign it there. The resulting notarization is an irrefutable record of the both the document and the signatures.

Like a RL notary, the notary in SL doesn't vouch for the veracity of the documents, just that they were signed and identities of the signatories. Nonetheless, in RL, we vest great value in signatures. I believe that in SL we will too.

Hence, I think that one could, for example, be an accountant or an auditor in SL. You could be paid by SL businesses to review their details, and prepare public summaries (which explain a business' financial position without divulging details) which both the accountant and the business owners would sign. The trustworthiness lies in the independence of the accountant and the willingness to attest to the statements.

Of course, since SL is so small now, it is hard to establish that independence, and it is hard to have a large field of customers. But this will change....

As for undertaking boring fields in SL, a true story: I guy lands on my build as I'm working on it:
guy: "I like your build, will this be your home?"
me: "No, this is my business."
guy: "Oh, what business are you in?"
me: "I'm a notary."
guy: "I meant in SL."

Zarf, I agree that it is simple to implement from a technical perspective. At least one organized community in SL provides regular basic financial accounting, publishing a balance sheet and income statement, and there are probably more than I've not yet found (but would like to).

As anyone who has worked with auditors knows, auditing is an entirely different kettle of fish.

Perserving the independence of the accountant (or other professionals) who does bookeeping or auditing is important. In FL, one key is for professionals (doctors, lawyers, architects, engineers, actuaries, accountants) to have multiple clients and to be well paid. Cynics may sneer that the "well paid" is self-serving, but the theory is that a professional should not be so hungry for any particular client's business that he/she will cut corners and "tell them what they want to hear" in order to keep their business.

The FL disaster of Enron and Arthur Andersen is an example of what can happen if a professional becomes too closely tied to any one client. See, e.g. http://money.cnn.com/2002/05/13/news/andersen/index.htm

So, I suspect that there is a minimum critical mass of clients for any professional in SL before a professional can be independent. And those clients need to be prepared to compensate the professional sufficiently to have them do a professional job. Doctors, lawyers, actuaries and the like enjoy their profession, but much of it is long, dull, boring preparation, study or work that they do for pay and the satisfaction of a completed job well done.

While some work for peanuts (or Lindens) on a labor of love, in an academic study, or in public service, few will work for peanuts (or Lindens) just so someone else can make a profit.

Yuck! I do this in RL, the thought of having to do it in SL is unbearable!

However I agree with the posts, how can an auditor confirm anything?