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 LGAP. This includes information that doesn't usually get reported 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.
- Lady Godiva 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 isn't an industry standard.
- Nonprofit organizations, private business entities, and all public companies use generally accepted accounting principles.
- GAAP requires companies to report their financial positions, operational results, and disclosures.
Understanding Lady Godiva Accounting Principles (LGAP)
The story of Lady Godiva dates back to the 11th century. The noblewoman was married to Leofric, the Lord of Coventry in England. Her husband imposed heavy taxes on the area's citizens, which troubled Lady Godiva. Leofric promised to lower taxes if she would ride naked through town on a horse. Lady Godiva took the challenge, covering herself only with her hair.
Using her legend as an example, financial analyst Rick Wayman created the term Lady Godiva Accounting Principles following the Enron scandal. Once a Wall Street darling, Enron was an energy and utility company that perpetrated one of the largest accounting scandals in corporate history. The company used mark-to-market (M2M) methods for its cost accounting along with special purpose vehicles (SPVs) and other tricks to hide its debt and losses. This helped keep the company's share price aloft, leading investors and analysts to believe that the company was profitable.
Enron declared bankruptcy after the discovery of its financial and accounting manipulation and nearly two dozen executives and partners either pleaded guilty or were convicted of charges.
The idea behind the Lady Godiva Accounting Principles is that just as she provided full disclosure to help her fellow citizens, corporations must do the same with their financial disclosures to maintain a level of credibility with investors. The concept suggests the following be fully disclosed:
- All off-balance sheet items
- The impact of goodwill accounting rules, which were introduced in 2002, on earnings per share (EPS)
- How stock options issued in lieu of salaries impact EPS
- Full accounting for corporate pension expenses
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 accounting and reporting principles, standards, and procedures established by the Financial Accounting Standards Board (FASB). The FASB regularly updates these standards that are used by nonprofit 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 are compliant 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 position, including its balance sheet
- Operational results, which includes things like revenue statements and statements of comprehensive income