Compliance Review Report - Harris Meats & Groceries Inc.

Prepared by: Samson & Associates
Date: December 7, 2012

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 that lack year-round surface and marine transportation link to southern centres.

Accordingly, Aboriginal Affairs and Northern Development Canada (AANDC) commissioned a compliance review based on specific objectives for the period covering April 1, 2012 to July 31, 2012. 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: The recipient has instituted procedures to ensure that the value of the subsidy is passed on to customers through lower prices.

Conclusion: The recipient is passing on the subsidy to the consumer for NNC-eligible items shipped by air freight.

ii) Program Visibility

Review Objective: Verify that program visibility requirements are met (e.g. that the amount of the subsidy reduction is clearly identified on customers' invoices).

Conclusion: The review revealed that the recipient was clearly identifying the subsidy reduction on customers' invoices.

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.

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, except as highlighted below.

Observation #1: The review revealed that the itemized shipment report submitted to the program's claims processor under contract with AANDC (the claims processor) contained fields where "#NA" would appear. Upon our discussion with the recipient's staff, they were aware of this malfunction in their software and had begun repairs for their August report. NNC has indicated that the October 2012 report does not contain fields where "#NA" would appear. Consequently, we have concluded that the malfunction in the software has been repaired.

Recommendation #1: No recommendation required.

Observation #2: The review revealed that the amounts in kg and amounts in $ as identified on the itemized shipment report submitted to the program's claims processor did not reconcile with the amounts in kg and amounts in $ as indicated on the subsidy claim provided to the claims processor.

Upon further examination it was determined that the amounts in kg and amounts in $ as indicated on the subsidy claim provided to the claims processor and the subsidy rebate provided to the customer were accurate. However, on inspection of the itemized shipment report, we found that corrections or modifications to invoices that were initially created were not accurately reflected on the itemized report, resulting in differences between this report and the subsidy claim. The recipient indicated that this error occurs when employees do not do a recalculation of the invoice when doing a correction or modification of the initial invoice.

Recommendation #2: The recipient should ensure that any corrections or modifications are accurately processed and reflected on the itemized shipment report. The recipient should also ensure that the itemized shipment report submitted to the program's claims processor reconciles with the subsidy claim.

iv) Respect of Program Rules

Review Objective: Verify that recipients respect 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 60'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 that lack year-round surface and marine transportation links to southern centres.

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 and non-food items 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 receive advance payments based on forecasted weights). These documents 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 July 1, 2012, eight northern retailers, 25 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 the recipient compliance review is to provide assurance that the NNC recipient is in compliance with the terms and conditions of the funding agreements signed with AANDC. Specifically, the compliance review will:

  1. Verify that recipients are passing on the value of the subsidy to customers, 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 that program materials, such as posters, are clearly visible in the store, and, for southern suppliers, that the amount of the subsidy reduction is clearly identified on customers' invoices);
  3. 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; and
  4. Verify that recipients respect all program rules, especially with respect to sales to ineligible clients such as mining camps or construction companies.

2.3 Scope

The scope included the funding provided by AANDC to Harris Meats and Groceries Inc. for the period April 1, 2012 to July 31, 2012. The onsite review was conducted at the offices of Harris Meats and Groceries Inc. in Winnipeg, Manitoba, from September 10 to 13, 2012.

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;
  • Accounts receivable to ensure that ineligible customers such mining and construction companies are not receiving the subsidy;
  • 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. The sampling approach and appropriate coverage were determined during the planning phase of the review.

2.5 Conclusion

With the exception of the observation and recommendation presented in Section 3.3, in our view, the recipient has complied with the objectives of the 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: The recipient has instituted procedures to ensure that the value of the subsidy is passed on to customers through lower prices.

Conclusion: The recipient is passing on the subsidy to the consumer for NNC-eligible items shipped by air freight.

Observation Note: Harris Meats and Groceries Inc. is a southern supplier who receives orders form northern customers by phone, fax or e-mail. Once an order is taken, it is picked in the Harris Meats and Groceries Inc. warehouse and subsequently shipped with the invoice which indicates the level 1 and level 2 subsidy rebate amounts that were allocated.

Selling price of items is set using the following formula: cost of item plus profit margin less subsidy rebate plus freight.

3.2 Program Visibility

Review Objective: Verify that program visibility requirements are met (e.g. that the amount of the subsidy reduction is clearly identified on customers' invoices).

Conclusion: The review revealed that the recipient was clearly identifying the subsidy reduction on customers' invoices.

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.

We tested the recipient's reporting and claiming procedure by selecting a random number of transactions from the total claims produced from April 1, 2012 to July 31, 2012 by using statistical sampling techniques.

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, except as highlighted below.

Observation #1: The review revealed that the itemized shipment report submitted to the program's claims processor under contract with AANDC (the claims processor) contained fields where "#NA" would appear. Upon our discussion with the recipient's staff, they were aware of this malfunction in their software and had begun repairs for their August report. NNC has indicated that the October 2012 report does not contain fields where "#NA" would appear. Consequently, we have concluded that the malfunction in the software has been repaired.

Recommendation #1: No recommendation required.

Observation #2: The review revealed that the amounts in kg and amounts in $ as identified on the itemized shipment report submitted to the program's claims processor did not reconcile with the amounts in kg and amounts in $ as indicated on the subsidy claim provided to the claims processor.

Upon further examination, it was determined that the amounts in kg and amounts in $ as indicated on the subsidy claim provided to the claims processor and the subsidy rebate provided to the customer were accurate. However, on inspection of the itemized shipment report, we found that corrections or modifications to invoices that were initially created were not accurately reflected on the itemized report, resulting in differences between this report and the subsidy claim. The recipient has indicated that this error occurs when employees do not do a recalculation of the invoice when doing a correction or modification of the initial invoice.

Recommendation #2: The recipient should ensure that any corrections or modifications are accurately processed and reflected on the itemized shipment report. The recipient should also ensure that the itemized shipment report submitted to the program's claims processor reconciles with the subsidy claim.

3.4 Respect of Program Rules

Review Objective: Verify that recipients respect 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.

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

Recipient's Comments:

We agree with the observation and recommendation and have made the necessary modifications. In addition, once the problem was identified, (with the difference between the item shipment report and subsidy claim) we ensured ourselves that all weights on the invoices were recalculated after any changes.

Auditor's Response:

No response required.

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