The term Lying Character Screen, or LCS refers to the (frequently) incorrect values displayed in the Character window, in game in . The resistances, character level, and experience are generally shown correctly. Other values, especially damage, can be quite misleading.
Why the errors?
These display errors are primarily due to changes in the game during various patches. How damage, defense, hit points, and other values are calculated has changed with the addition of new item properties and spell interactions, and those changes aren't necessarily reflected in the figures on the Character screen, which calculates the displayed values in different, often outdated, ways. Some modifiers aren't calculated, and in others the order of operations has changed.
A few of the well-known LCS issues.
Perhaps the best known example of the LCS is that it grossly understates the damage of the Paladin's Smite skill. Bonuses to +enhanced damage % are not calculated in the LCS display of Smite damage, and there are some other order of operations errors as well. A typical Paladin with around 5000 Smite damage will see something like 1200 damage displayed.
The LCS will display the damage of your Paladin's Blessed Hammer skill much too high if you are in a party and sharing in the benefit of a Might or Fanaticism aura, whether cast by another player or a merc. Blessed Hammer only gains in damage from your own Concentration aura.
The +damage modifier found on some items added in v1.10 (such as the Grief runeword) is not calculated in the LCS. This results in a displayed damage that can be exponentially lower than the actual damage.
Arguing Damage Types
Characters with their damage boosted from different sources, such as added poison and a Might aura, will often see one damage, or the other. But not both added up, which is what their character is actually dealing.