Compliance Review Report - Le Marché Daoust Inc.

Prepared by: Samson & Associates
Date: March 2014

Table of contents

1.0 Executive Summary

On April 1, 2011, the Nutrition North Canada (NNC) replaced the Food Mail Program, which was operated by Canada Post since the late 60's. Much like Food Mail, the purpose of Nutrition North Canada is to make nutritious food more accessible and more affordable to residents of isolated northern communities.

Accordingly, Aboriginal Affairs and Northern Development Canada (AANDC) commissioned a compliance review based on specific objectives for the period covering July 1, 2012 to July 31, 2013. The results of the review are as follows:

i) Passing on the Subsidy

Review Objective: Verify that the recipient is passing on the value of the subsidy to consumers, i.e. that selling prices are reduced by the amount of the subsidy.

Finding #1
It was observed during the review that in 3% of reviewed invoices (2/60) the NNC subsidy indicated on the consumers' receipts did not include the weight of containers representing an additional 5% as calculated in the NNC monthly claim summary. Although they have been deemed non-material, the observed errors represent an overcharge of $24.60 for subsidy Level 1((4.18 kg x $5.20) + (1.30 kg x $2.20)) and $0.67 for subsidy Level 2 ((.19 kg x $3.40) + (.05 kg x $0.40)).

Conclusion
The review indicated that recipient is passing on the value of the subsidy to consumers, with the exception of Finding #1 as noted above.

ii) Program Visibility

Review Objective: Verify that program visibility requirements are met (i.e. the subsidy rates are written on consumer receipts).

Conclusion
Le Marché Daoust Inc. is a southern supplier. The review indicated that the recipient is clearly identifying the subsidy rates on consumers' receipts.

iii) Claims and Reporting

Review Objective: Test the recipients' reporting and claiming systems and procedures with regards to gap and control issues, i.e. verify that the process used by recipients to prepare detailed reports and calculate the amount of subsidy to be claimed is sound and precise, and that mechanisms to detect and correct errors are in place.

Finding #2
During the review we observed that 5% (3/60) of reviewed invoices contained typing errors where weight had been entered in the claim report. For further details, please refer to Finding #2 in Section 3.3.

Conclusion
The review of the reporting and claiming systems and related procedures revealed that the controls were adequate to ensure the subsidy being claimed is precise and that mechanisms to detect and correct errors were in place, with the exception of Finding #2 as noted above.

iv) Respect of Program Rules

Review Objective: Verify that the recipient respects all program rules, especially in regards to sales to ineligible consumers such as mining camps or construction companies.

Conclusion
The review revealed that the recipient was respecting the program rules with respect to sales to ineligible consumers

2.0 Introduction

2.1 Background

On April 1, 2011, Nutrition North Canada (NNC) replaced the Food Mail Program, which was operated by Canada Post since the late 1960's. Much like Food Mail, the purpose of NNC is to make nutritious food more accessible and more affordable to residents of isolated northern communities.

There are currently 103 communities eligible for the program (84 are eligible for a full subsidy and 19 for a partial subsidy), located in Nunavut, the Northwest Territories, Yukon, Labrador, Quebec, Ontario, Manitoba and Saskatchewan. Two levels of subsidy rates per kilogram have been established for each community; Level 1 (higher) for the most nutritious perishable foods and Level 2 (lower) for other eligible items. Communities where operating and transportation costs are higher (e.g. Grise Fiord, Nunavut) tend to have higher subsidy rates.

Northern retailers and southern suppliers registered with the program (the recipients) are responsible to manage their supply chain and claim a subsidy from NNC for eligible food that they air ship to eligible communities. On a monthly basis, they must submit a claim form (kg x subsidy rates), a detailed shipment report (kg per item, community, client type, etc.), invoices and waybills to receive the payment (most are entitled to advance payments based on forecasted weights). These are submitted to the program's claims processor under contract with AANDC (the Saskatchewan Institute of Information Technology in collaboration with Crawford). The claims processor verifies the claims and provides NNC with a recommendation for payment. Registered northern retailers must also submit, directly to NNC, a monthly pricing report for a pre-determined list of food items. These and other program requirements are identified in contribution agreements between the recipients and AANDC.

As of June 28, 2013, seven northern retailers, 28 southern suppliers and three country food processors were registered with NNC. Northern retailers are those entities that operate one or multiple food retail stores in eligible communities. Southern suppliers are food providers operating out of non-NNC communities that supply eligible items directly to small northern retailers, commercial establishments (restaurants, etc.), social institutions (daycares, etc.) and individuals (referred to as direct or personal orders) located in eligible communities. Country food processors are plants located in Cambridge Bay, Rankin Inlet and Pangnirtung in Nunavut that transform fish and meat for distribution to eligible communities within the region.

The selection of recipients for this compliance review was based on perceived risk and geographical location. Risk levels for compliance review purposes were based on the current experience with recipients regarding the claiming and reporting process, i.e. difficulties encountered by the claims processor, on information brought to the program's attention by interested parties, and on materiality. For practicality and cost-effectiveness reasons, at least two recipients have been selected per geographical location.

2.2 Objectives

The objective of recipient compliance reviews is to provide assurance that NNC recipients are in compliance with the terms and conditions of their respective funding agreements signed with AANDC. Specifically, the compliance reviews will:

  1. Verify that the recipient is passing on the value of the subsidy to consumers, i.e. that selling prices are reduced by the amount of the subsidy;
  2. Verify that program visibility requirements are met (e.g. for northern retailers, that subsidy rates are written on cash receipts and program material, such as posters, are clearly visible in the store, and, for southern suppliers, that the amount of the subsidy reduction is clearly identified on clients' invoices);
  3. Test the recipient's reporting and claiming systems and procedures with regards to gap and control issues, i.e. verify that the process used by the recipient to prepare detailed reports and calculate the amount of subsidy to be claimed is sound and precise, and that mechanisms to find errors and fix them are in place; and
  4. Verify that the recipient respects all program rules, especially with respect to sales to ineligible clients such as mining camps or construction companies.

2.3 Scope

The scope of the compliance review included the funding provided by AANDC to Marché Daoust Inc. for the period July 1, 2012 to July 31, 2013. The on-site review was conducted at the offices of Marché Daoust Inc. in Valleyfield, Québec, from December 8 to 11, 2013. A debrief of the compliance review was given to the recipient on December 11, 2013.

2.4 Approach and Methodology

The compliance review included the examination of the following:

  • The pricing/invoicing practices in relation to the subsidy, e.g. profit margins on subsidized products vs. unsubsidized products;
  • The weighing and shipping process;
  • The sale and/or purchasing records and supporting documentation to verify compliance with program rules;
  • The reporting and claiming systems and procedures, to determine how the recipient:
    • ensures that only eligible items are claimed for and reported;
    • calculates the appropriate weight of items being claimed;
    • makes monthly claims and detailed reports that are valid and accurate; and
    • ensures controls are in place to find errors and fix them on a timely basis.

Furthermore, the review included the conduct of interviews with the recipient, NNC staff and the person responsible for processing claims. The sampling approach and appropriate coverage were determined during the planning phase of the review.

2.5 Conclusion

We find that the recipient has complied with the objectives of the compliance review.

3.0 Compliance with the Objectives

3.1 Passing on the Subsidy

Review Objective: Verify that the recipient is passing on the value of the subsidy to consumers, i.e. that selling prices are reduced by the amount of the subsidy.

Finding #1
When invoices are prepared, weight is pre-determined for certain items and variable for others. All variable-weight items are weighed as needed using scales in the packaging department. A 5% adjustment is added to the weight of these items to reflect the packaging weight (containers). The weight of items eligible for each level (1 and 2) is then entered as a deduction on client invoices with the per-kilogram subsidy according to the NNC-prescribed rate. Administrative and transportation costs are then added to the invoice.

It was observed during the review that in 3% of reviewed invoices (2/60) the NNC subsidy indicated on the consumers' receipts did not include the weight of containers representing an additional 5% as calculated in the NNC monthly claim summary. Although they have been deemed non-material, the observed errors represent an overcharge of $24.60 for subsidy Level 1((4.18 kg x $5.20) + (1.30 kg x $2.20)) and $0.67 for subsidy Level 2 ((.19 kg x $3.40) + (.05 kg x $0.40)).

Recommendation #1
The recipient must ensure that the subsidy to the consumer includes an additional 5% to include the weight of containers claimed monthly to NNC.

Conclusion
The review demonstrated that the recipient is passing on the value of the subsidy to consumers, with the exception of Finding #1 as noted above.

3.2 Program Visibility

Review Objective: Verify that program visibility requirements are met (i.e. the subsidy rates are written on client receipts).

Conclusion
The review revealed that the recipient was identifying the subsidy rates on clients' receipts.

3.3 Claims and Reporting

Review Objective: Test the recipients' reporting and claiming systems and procedures with regards to gap and control issues, i.e. verify that the process used by recipients to prepare detailed reports and calculate the amount of subsidy to be claimed is sound and precise, and that mechanisms to detect and correct errors are in place.

The recipient must provide two separate reports to receive the NNC subsidy.

Report #1 – Claim Report
This report indicates, for each item delivered to all clients, the community ID, the client name, the NNC item ID, the NNC item description, the subsidy level, the weight shipped, the invoice number and the proof of delivery number.

Report #2 – Claim Form
This report indicates the total weight per subsidy level (1 and 2) and the subsidy per community. The report also includes a summary of all weights per subsidy level (1 and 2) and the total subsidy for all communities.

Finding #2
The recipient uses two distinct systems for billing commercial and individual clients. The main difference is that commercial clients purchase products from other stores, while individual clients purchase products sold by the recipient.

For commercial clients, each invoice is manually entered in the claim report. For individual clients, a monthly report is produced automatically by the sales system and the information is then copied into the NNC report without additional manual entries.

We performed tests to ensure that the weights indicated on the invoices were consistent with the weights indicated in the NNC reports. Our audit found that 3 of the 58 commercial invoices examined contained indicated weights that were inconsistent with the weights entered in the NNC report prepared by the recipient. The recipient affirmed that these inconsistencies are typing errors committed while entering the weights in the NNC claim.

Recommendation #2
The recipient must pay particular attention when entering weights in the claim report and investigate any significant gaps between the weight on the invoice and the weight on the freight order.

Conclusion
With the exception of Finding #2 as noted above, the review of the reporting and claiming systems and related procedures revealed that the controls were adequate to ensure the subsidy being claimed is precise and that mechanisms to detect and correct errors were in place.

3.4 Respect of Program Rules

Review Objective: Verify that the recipient respects all program rules, especially in regards to sales to ineligible consumers such as mining camps or construction companies.

Note #1
During our visit to the recipient's place of business, we interviewed the manager of the Northern orders department, who indicated that she and her team are very familiar with the program rules, as they have been in place since the start of the program. This included familiarity with the ineligibility of certain consumers such as mining camps or construction companies. Internet research and consultation with other local clients is undertaken as needed if there are questions concerning the eligibility of a new client. Our review of a representative sample of invoices demonstrated that the recipient had not made sales to ineligible consumers.

Conclusion
The review revealed that the recipient was respecting the program rules with respect to sales to ineligible consumers.

Appendix A - Recipient's Comments to the Draft Report and the Auditor's Response

Recipient's Comments:

The draft report seems clear, and as you indicated the problems are mostly typing errors. We have (since meeting with you) improved our method of calculating and inputting figures to provide additional opportunities for verification.

Response from Samson & Associates:

No response required.

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