Accounting?

Hmm, there are ways of doing some accounting in SL. Basically, this means giving auditors access to all financial data and the scripts used to extract it. In a sense, this "due dilligence" procedure will effectively give the auditor all "secret" information possible. They may look at scripts, in-world and web-side, to see if the data extracted actually looks like what they claim to be.

Now, putting that much amount of trust in the auditors' hands is hard to do. Yes, you can sign up a legally-binding contract and drop it in Nota Bene. The problem is, if there is a conflict of interests arising from access to "confidential data", who is going to moderate it, or enforce the need of proper compensation from the loss of confidential secrets?

Ah well. I've just written an article for one of the many SL magazines/newspapers precisely on that issue. Without a global government, with the ability to enforce laws, there is no easy way out of this. Although I personally hope that local governments will be able to fill in the void for a time.

It's no surprise for many of you that I'm part of Neualtenburg. All these issues have been dealt with in the city, literally over a year ago. You just need to be a citizen (ie. buy land) and register a business there, and you'll get the legal protection that the local government gives you. There is a court system, and a system of appeals, as well as an overall Treasurer who will audit businesses. Unlike some crazy ideas circulated around Neualtenburg, it's not "a bunch of friends that bought a sim to have fun together". Not only almost all citizens there never met each other (we're all anonymous strangers who happen to be in the same SL space together), but they have very often conflicting opinions about each other. Thus, a system of compromises and arbitration of disputes is necessary to make the city work. Although the system has many faults — what system doesn't? — at least the citizens know that they have rights that are enforceable, and a latest trend has been the discussion of having companies headquartered in Neualtenburg (but with grid-wide operations) in order to give those companies a legal framework to operate under, and customers of the companies a place to file their complains, making sure there will be legal proceedings in case of complains. This is not something that we envision that would happen so soon — Neualtenburg law only applies to Neualtenburg citizens and their businesses inside the city jurisdiction. The notion of "multinational" (multi-sim?) companies headquartered in Neualtenburg for the legal protection of their businesses and their customers grid-wide is a pretty new one. But with the beginning of the establishment of embassies and "trade posts" elsewhere on the grid, I guess the Neualtenburgers will need to address foreign policy soon...

Quis custodiet ipsos custodes? And who loses if the watchers make stuff up? Arthur Anderson faced criminal penalties and was lost all their trust as a result of the Enron scandal. There are no such penalties in SL.

Those who ask others' trust can be required to show a significant investment in Lindens and or land, put at risk of loss if the default on their trust.

Those who seek to enforce obligations of trusted parties can refuse to place trust in them until they do so post some such form of security.

While the loss is limited to the investment "in world" (and the reputation of that avatar), it is something.

And RL business is often transacted in a particular jurisdiction with a "choice of laws" provision precisely to invoke special protections of that jurisdiction. The Crown Colony of Bermuda is an excellent example, in which many RL companies have re-incorporated in order to take advantage of local corporate and tax shelter law. The government of China is actively promoting the development of RL law protecting "virtual property" in order to make its jurisdiction a favored one for the booming business of providing "virtual worlds" like SL.

It is conceivable that SL jurisdictions may evolve as havens for contract enforcement through virtual financial security devices, and as a result find that they become a preferred venue in which SL business and financial moguls invest their capital and surplus.

Time will tell how many SL jurisdictions so evolve and compete for such investment, like the competition seen today between various venues such as Bermuda, Bahamas, Caymans, Channel Islands and Turks & Caicos.

Who is going to certify the Auditors and Accountants? Who is going to regulate them? Who laws are they going to follow and under what justification? Not all of the SL residents are Americans subject to American law.

With the introduction of Accountants, the taxman is soon going to show up. The big people in SL now want to bring the burden of the American tax system on the free residents of SL. What next? Perhaps you can introduce "morality" laws to regulate people’s conduct? Perhaps you can make a "jail" for "criminals" and perhaps RL and SL will merge getting your rl self in an American jail for breaking American "law".

I am not being an American Basher but see these things coming since it is part of my rl job to anticipate the future.

There is a way to look at SL as a "new frontier". I remember one of Philip's articles in his post when he compares the two major endeavors of Humanking in the 21st century: expanding to the "outer space" and the "inner space" (virtual worlds). During this expansion phase, we naturally will use existing law systems to serve as a guideline. Some of you may know that at least a few businesses in SL are actually RL companies. SpaceThinkDream (who holds the Avalon brand) is a trademark of a RL British company. GOM was a Canadian company. The company behind SL Exchange is US. And there are a few more on the content business as well. Each of these companies are subject to their respective countries' laws. In a sense, they are RL businesses, subject to their respective national laws, but they explore commercially a "frontier space". Their accounting is done by RL accountants, using the respective accounting systems in their own countries. So, I don't see any problems with this approach — so far, it's the best "mix" between both worlds that I've seen.

The issue really only if you wish "SL accountants" answering to "SL law". Now that is much more interesting. We're not there yet, and probably will never be. "SL law" needs an authority and enforcement agents. Both are possible to a degree if you have some sort of supra-organisation — what we in RL call a "government". Since we don't have that, it's impossible to speak of "SL law" — we can only fall back to what ToS and the Community Standards give us in terms of structure and organisation. Accounting is definitely not covered by either of those two documents.

The issue comes down to "Can you have a system of law where there isn't recourse to some underlying physical penalty?"

In modern RL, if you are eternally obstinate, and refuse to abide by the rules and judgments of your legal system, eventually some branch of your government stations agents with rifles outside your door.

In SL, or any virtual world, we could tie virtual law to RL law, and hence have the recourse to physical penalty. Or, virtual law could be tied to TOS and the like, and hence be tied to only monetary penalty. Or, perhaps there is a way to base virtual law without such recourse at all.

Athenian law had a provision for expulsion: Those found guilty could escape any penalty (including death) by choosing exile. (See "The Trial of Socrates" by I. F. Stone, which has a fine overview of the Athenian legal system, and some insight as to why Socrates didn't choose this option.)

This points to the possibility that virtual law could be built on the foundation of belonging to a group, and the threat of expulsion from the group.

The example of Neualtenberg seems to speak to this. Here is a working legal system that arises mostly out of the construction of the group. But it is also tied to the land. It holds the dual threats of expulsion and economic seizure over its members.

The SL Mediators Guide Book (which I helped draft) bases its system on the ultimate recourse of public expulsion. Those agreeing to mediation up front, but then, after a dispute, are unwilling to abide by the mediated resolution, are banned from mediation for a period. The ban list is made public so that others will know not to enter into mediation agreements with them.

The example of Enron shows that just by being in a "regulated" industry isn't sufficient. After all was said and done, I think one could easily make the case that it was harm to their public perception that made accounting companies change (a little), rather than the very few criminal and civil judgments against them.

Personally, I'd like to see virtual law that arises out of the group, rather than out of being tied to RL law, and hence physical threat.

For those interested in the SL Mediator's Guide Book, a copy can be obtained in world at the notary, "Nota Bene", in Thyris 14,178.

The notion of RL jurisdictions developing law favorable to virtual worlds is highly intriguing. Alas, must jurisdictions that have done this sort of thing for business (Bahamas, Caymans, etc..) have poor records on social rights. And the country cited as developing such law, China, has an abysmal stance on human rights.

Zarf and Gwenyth, et al

Further to the challenge of enforcement:

As one thought experiment, I yesterday posted a theory on which might be based enforcement of penalties against defaulting contractors. Accountants would be a natural choice to be among those that clients may wish to demand some security against their default or failure to perform. The theory contemplates their posting security in the form of liens against land interests, against which creditors and wronged clients or third parties could execute. It does require some planning and organization and prior investment by the parties against whom recourse would be sought.

The theory also includes a dispute resolution process and is in the Political Science forum as a Request for Comment, "Towards a Theory for Enforcing Contract, Resolving Disputes & Incorporation":
/148/86/78317/1.html

It is a pitty that people want to introduce RL things into a "game" Next will come contract law and the lawyers! Gag me! No on second thought one of you out there is just awaiting your chance to do that!

I play second life to get away from the pressures of Real Life.

Dont like the trend of this line of thought. It will lead to no good.

I have to agree whole heartedly with this comment, I play SL to get the hell away from these RL things, and I am sure that many others do as well, this is the purpose of SL, to have fun, and be innovative about it. Not to be looked over by laywers, or be taxed on lindens.

Ranma, it seems that you fear that, for some reason, your freedom will be restricted while others need more protection on business transactions — namely, valid accounting for SL companies.

Fortunately, both systems can run side-by-side. By this I mean that you can have some sort of accounting & legal system — if one manages to enable "enforcing authorities" for those who wish the benefits of them — while others are simply beyond that system.

Imagine a SL with an optional enforcing authority. Businesses registered with that authority are required to present some sort of accounting towards that authority. You, as a consumer, are able to make a choice: either you deal with an accounted-for business, or you take your chances with one that has no external accounting and auditing. The choice is ultimately yours, but, in the first case, you can have a third party verifying that business' claim. In the second case, it's only a question of trust — there is no third party validity.

As a consumer, who would you prefer to do business with?

In RL, this exists, to several degrees. Accounting is usually easier than a legal, enforcing authority, and it can rely upon trust only. Many third-world countries with shaky legal systems deal with this issue every day: how can they prove to international investors that their accounting is done correctly? The answer, of course, is outsourcing an "outside" accounting service — like the ones provided by a European, American, or Japanese consulting company. They provide, for a fee, a validity of the accounting under a well-established accounting system — and not under the own country's legal system. This happens all the time. This could happen to SL as well. I can imagine that a SL company audited by KPMG or PWC or whatever international auditors you fancy would certainly be more trusted...

Also, organisations like the World Trade Organisation are able to set up accounting, commerce and finance rules, without needing to employ "force". Basically members just need to accept its rulings if they wish to be part of it. This is of course not unlike other types of international organisations; their "enforcement" is valid to the point that members may voluntarily (or involuntarily) leave if they aren't willing to follow those guidelines any more. This, again, is perfectly possible to do in Second Life.

The biggest issue in SL is, of course, critical mass. A 20-member "Chamber of Commerce" or similar organisation simply won't be able to make it. Who cares if 5 businesses in SL are regularly audited by some anonymous avatar who nobody ever heard about? Clearly, this will only happen when a group manages to attract thousands and thousands of members. So far, all attempts to do something like that utterly failed — they collapsed due to lack of support, and because the effort to set up similar organisations far outweight the benefits.

Contracts, non-repudiable notaries ("Nota Bene" from Zarf) and laywers (or at least arbitrators/mediators) already exist, and they certainly will continue to exist and increase, as SL businesses grow and become interesting enterprises. To a degree, however, I think that a SL business that growths to a point it's able to sustain finantially its RL members (ie. they are able to live off their business in SL), they'll certainly prefer to establish themselves as RL companies instead. This trend will rather grow than otherwise. Imagine that a very charismatic "auditing group" is able to claim 20,000 SL merchants as their costumers. Certainly this will be give them a large amount of credibility — at least while they have a significant percentage of the user base. But with one million users in late 2007, these will only be 2% — not very important overall. The trick would be to be able to claim new members in the direct proportion of the user growth. But this is quite difficult. As can be seen in this thread, the younger a user is in SL, the less one is willing to accept the parallels between SL and RL; worse than that, older users (fortunately a dwindling minority, in relative numbers) are absolutely against it. So it's only a certain group of users — established well enough in SL and with some experience, but not too old — that is quite interested in protecting their reputation, their business, and their credibility. However, SL grows far faster than this group of interested users — because they need some maturity in SL, they'll always "lag" behind the newest batch of users, who will defend "escapism" as their sole reason for being in SL, and always outnumber the remaining users by far.

For me, I think, is that this approach doesn't work well for SL, until it reaches the limits of its possible growth. How far will this take? Well, the Internet is still growing, and about 15% of the world population is online (there is still space to grow). We haven't seen any types of "Internet business associations" to emerge world-wide. Instead, Internet commerce has been neatly integrated in the world commerce — it's just another medium — although there are some notorious exceptions. In the Internet, locally, you have "consumers' associations" — see what happens among eBay users, for instance — but these are never global in scope, i.e. my rating at eBay has no effect on my rating at Amazon.com, and so on.

So, the Internet, which in the mid-1990s was looked upon as the "new frontier", was slowly absorved over the years — the "frontier" became incorporated into the "mainland" over enough time. Second Life is still young. There is still this feeling that everything is far, far away from the "real world" — that somehow, by logging in, we can forget what's outside our windows, shut ourselves in, and isolate us from the real world.

But it's just an illusion. Granted, it may take a long time for that illusion to be dispelled — we don't need a million users in SL, but a billion or so — and we can certainly enjoy it while it lasts. But ultimately, people in 2015 will list on their email signatures both the addresses for their homepages as well as their location in Second Life (or however it's going to be called in 2015) — meaning that SL, as a "new media", will probably be used, side-by-side, with other media like mobile phones or email addresses, to communicate, to keep in touch, and — to do business.

Still, nothing prevents people from side-stepping the incoming avalanche and isolate themselves from the rest of the world. They do it every day on the Internet today. They'll probably do the same in SL in 2015. There is definitely room for both views, side by side.

Not afraid of the ideal but worried about the process. I went to University in America and took all of the required courses. It is a big reason I recieved my current position.

The problem is there is no goverment and who wants one anyway? I do not spend enough money to worry about "fiscal responsibility". Also as you state how will one get all of the parties to agree?

I see too many problems to have a workable system.

With any luck it will not be a problem to other people or myself.