Journal of Finance and Accountancy Pro forma versus GAAP, Page 1 Pro forma versus GAAP reporting: an examination of differences in investor perceptions KEVIN L. JAMES MIDDLE TENNESSEE STATE UNIVERSITY FRANKLIN A. MICHELLO MIDDLE TENNESSEE STATE UNIVERSITY ABSTRACT Many companies report profitability using pro forma earnings along with GAAP earnings. However, strong debate exists on the use of pro forma earnings reports. Proponents say that managers use such reports to help stockholders focus on the most salient details of the financial statements, while critics believe they are misused by managers to cast a positive light on undesirable financial results. The purpose of this exploratory study is to directly examine investor perceptions of pro forma earnings and to investigate whether differences exist between professional and non-professional investors in their perceptions of pro forma earnings compared to GAAP earnings reports. Results indicate that both professional and non-professional investors perceive pro forma earnings reports as less useful than GAAP reports. This finding contradicts previous research based on stock return data. Overall, results also indicate that non-professional investors may fail to adequately adjust for potential management bias in pro forma reports which could lead to suboptimal decision-making and poor or negative returns. Both groups of respondents agreed that standards should be developed for pro forma reports and those pro forma earnings releases should be reviewed by a certified public accountant prior to public release. KEYWORDS: Pro forma, GAAP, Investor perceptions, accounting qualities, novice investors