What are Lady Godiva Accounting Principles (LGAP)?
The term Lady Godiva Accounting Principles (LGAP) refers to a theoretical set of accounting principles that require full disclosure. This means that all information must be disclosed by companies under the LGAP, which includes information that is not generally disclosed to investors under generally accepted accounting principles (GAAP).
The term was coined by a financial analyst in response to the Enron scandal and is not an industry standard.
Key points to remember
- Lady Godiva’s Accounting Principles are a theoretical set of accounting principles that require full disclosure from companies.
- The term was coined by Rick Wayman, a financial analyst, after the Enron scandal.
- LGAP is not an industry standard.
- Nonprofit organizations, private business entities and all public enterprises use generally accepted accounting principles.
- GAAP requires companies to report on their financial condition, results of operations and disclosures.
Understanding Lady Godiva’s Accounting Principles (LGAP)
Lady Godiva’s history dates back to the 11th century. The nobleman was married to Leofric, the Lord of Coventry in England. Her husband imposed heavy taxes on the citizens of the area, which confused Lady Godiva. Leofric has promised to cut taxes if she rides naked through town on a horse. Lady Godiva rose to the challenge by covering only her hair.
Using her caption as an example, financial analyst Rick Wayman coined the term Lady Godiva Accounting Principles in the wake of the Enron scandal. Once the darling of Wall Street, Enron was an energy and utilities company that perpetrated one of the biggest accounting scandals in company history.
The company has used mark-to-market (M2M) methods for its cost accounting as well as special purpose vehicles (SPVs) and other tricks to hide its debt and losses. This kept the company’s stock price high, leading investors and analysts to believe the company was profitable.
Enron declared bankruptcy after discovering his financial and accounting manipulation and nearly two dozen executives and associates have pleaded guilty or been convicted of charges.
The idea behind Lady Godiva’s accounting principles is that just as she has provided full disclosure to help her fellow citizens, companies should do the same with their financial disclosures to maintain a level of credibility with investors. The concept suggests that the following should be fully disclosed:
Lady Godiva Accounting Principles (LGAP) vs. Generally Accepted Accounting Principles (GAAP)
LGAP may be a simple theoretical idea, but the accounting world generally follows generally accepted accounting principles. These are the accounting and reporting principles, standards and procedures established by the Financial Accounting Standards Board (FASB). The FASB regularly updates these standards which are used by non-profit organizations as well as private and public companies.
The Securities and Exchange Commission (SEC) recognizes the organization for its role in setting standards for publicly traded companies.As such, all public companies are required to file financial statements that comply with GAAP rules.Even though private companies are not required to do so, it helps their financial future with creditors and lenders.
Companies are required to report the following under GAAP:
- The company’s financial situation, including its balance sheet
- Operating results, which include items such as statements of income and statements of comprehensive income