Compliance Review Report - Labrador Investments Ltd.

Prepared by: Samson & Associates
Date: December, 2013

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 store managers (Nain, Makkovik and Hopedale) have the responsibility of establishing retail prices for products sold in their stores. For two of the stores reviewed, their procedure is to not add the cost of freight to the retail price of the subsidized products as compensation for the subsidy. We performed a review to determine if the difference between the actual subsidy and the cost of the freight was substantial and the results indicated that the subsidy received was sometimes greater than the freight paid. However, this difference was less than 5% of the subsidy received.

As for the third store, the cost of freight was added to all the retail price of the subsidized products and there was no subsidy provided to consumer with the exception of milk products.

Conclusion: The review concludes that the recipient was not passing on the full value of the subsidy to the consumer on eligible NNC products. Observations and recommendations have bee raised in section 3.3 of the report.

ii) Program Visibility

Review Objective: Verify that program visibility requirements are met (i.e. the subsidy rates are written on cash receipts and program materials, such as posters, are clearly visible in the store).

Finding: During our review, we were able to assess that the subsidy rates were written on cash receipts for only two out of three stores. However, posters are visible in the stores as per our visit of one of the stores and verbal confirmation obtained from the two other store managers.

Conclusion: The review revealed that the recipient was identifying the subsidy rates on the cash receipts for two out of three stores. Observations and recommendations have been raised in section 3.3 of the report.

iii) Claims and Reporting

Review Objective: 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 detect and correct errors are in place.

Conclusion: The review of the reporting and claiming systems and related procedures revealed that the controls were not adequate to ensure the subsidy being claimed is precise and that mechanisms to detect and correct errors were in place as described in section 3.3.

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 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 the recipient is 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 recipient's 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 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 included the funding provided by AANDC to Labrador Investments Ltd. for the period of April 1, 2012 to July 31, 2012. The onsite review was conducted at the offices of Labrador Investments Ltd. in Happy Valley-Goose Bay, Labrador and at its Big Land Grocery store in Hopedale, Labrador, from October 1 to October 5, 2012. We also performed a limited review of documentation relating to sales and shipping for the grocery stores situated in Nain, and Makkovik.

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 as mining and construction companies are not receiving the subsidy;
  • Onsite visit to the Hopedale Big Land Grocery store;
  • 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;
    • ensures controls are in place to find errors and fix them on a timely basis; and
    • provides accurate monthly pricing reports.

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

The recipient has complied with the objective #4 concerning the respect of program rules but has not complied with the objectives #1, #2 and #3 relating to passing on the subsidy, program visibility and claims and reporting. Observation and recommendation have been provided under section 3.3 of the report.

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 store managers (Nain, Makkovik and Hopedale) have the responsibility of establishing retail prices for products sold in their stores. For two of the stores reviewed, their procedure is to not add the cost of freight to the retail price of the subsidized products as compensation for the subsidy. We performed a review to determine if the difference between the actual subsidy and the cost of the freight was substantial and the results indicated that the subsidy received was greater than the freight paid. However, this difference was less than 5% of the subsidy received.

As for the third store, the cost of freight was added to all the retail price of the subsidized products and there was no subsidy provided to consumer with the exception of milk products.

Conclusion: The review concludes, as explained below, that the recipient is not always passing on the full value of the subsidy to the purchaser of eligible NNC products.

Observation #1: Labrador Investment Ltd. is a northern supplier who receives orders from its local stores located in Nain, Makkovik and Hopedale by phone, fax or e-mail. Their local stores also have the flexibility of putting in orders directly with other food suppliers. All invoices go through directly to the recipient's Head Office who will pay the invoices relating to the orders made by their stores. The Head Office is also responsible for all the shipping of merchandise to the stores. The store managers (Nain, Makkovik and Hopedale) have the responsibility of establishing retail prices for products sold in their stores. Our on-site visit to the Hopedale store revealed that the store manager was using a price calculation spreadsheet for subsidized and non-subsidized items. Using the following formula basically sets selling price of items: cost of item plus freight cost plus profit margin. If a product is subsidized, the price calculation will include a 0% increase for freight expense whereas non-subsidized items will include the percentage of freight reflected on the air flight company waybill. The total freight costs were sometimes less than the subsidy received. It should be noted that differences noted were less than five percent of the subsidy received.

In addition to the on-site visit at the Hopedale store, we have requested supporting documentation for three transactions from each of the other stores not physically visited (Nain and Makkovic) to determine if these stores were passing on the subsidy.

Based on our review, we can conclude that the recipient is passing on the value of the subsidy to consumers at the Hopedale store but we could not reach the same conclusion with regards to the two other stores that were not physically visited (Nain and Makkovic) due to insufficient evidence to provide an opinion on whether the stores are passing on the value of the subsidy to consumers.

Recommendation #1: We recommend that the recipient ensure that the full subsidy value be passed on to the purchaser of eligible NNC products.

3.2 Program Visibility

Review Objective: Verify that program visibility requirements are met (i.e. the subsidy rates are written on cash receipts and program materials, such as posters, are clearly visible in the store).

Finding: During our review, we were able to assess that the subsidy rates were written on cash receipts for only two out of three stores. However, posters are visible in the stores as per our visit of one of the stores and verbal confirmation obtained from the two other store managers.

Conclusion: The review revealed that the recipient was identifying the subsidy rates on the cash receipts for two out of three stores.

Observation note #1: During the visit to one of the recipient's stores, in Hopedale, it was noticed that the poster describing the subsidized program was not clearly visible as it was posted on a bulletin board amongst several other information and publicities. We did not see any other advertising of the subsidy program in the store. Therefore, the recipient should consider improving the visibility of the poster on the bulletin board and consider presenting additional advertising under the subsidized products sold in the store.

Observation #2: During our review, we have requested copies of cash receipts for the two other stores that were not physically visited. For one of the store, the subsidy rates were not written on cash receipts.

Recommendation #2: We recommend that the recipient ensure that the subsidy rates are written on cash receipts for all stores part of the NNC program.

3.3 Claims and Reporting

Review Objective: 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 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 using statistical sampling techniques.

Conclusion: The review of the reporting and claiming systems and related procedures revealed that the controls were not adequate to ensure the subsidy being claimed is precise and that mechanisms to detect and correct errors were in place as described below.

Observation #3: The recipient was not reconciling the total weight indicated on the air waybill with individual invoices. We found instances where the total weight on the air waybill was substantially different from the total weight of subsidized item invoices and the recipient could not provide us with an explanation. Reconciliation would provide some assurance to the recipient that the weight on the invoice is accurate and ensure the accuracy of the subsidy amount customers are entitled to.

The review also confirmed that the recipient was using the same weights for the subsidy passed and the subsidy claimed.

Recommendation #3: We recommend that the recipient reconcile the total weight indicated on the air waybill with individual invoices in order to provide assurance that the weight on the invoice is accurate. Any differences should be investigated and explained.

Observation #4: The review revealed that the recipient was grouping the weights of different products such as bread and hot dog buns under the same NNC item code even though each product has its own distinct NNC code. However, it was noted that the items grouped were all part of the same subsidy level. Nevertheless, the information reported on the itemized shipment is not accurate for information gathering purposes.

Recommendation #4: The recipient should use the appropriate distinct NNC item code for each product when preparing its itemized shipment report to NNC.

Observation #5: Some of the prices on the most recent price report did not reflect the actual prices on items displayed in the store. The differences might be due to recent price changes or errors made during the pricing reporting process.

Recommendation #5: The recipient should ensure that the prices indicated on the price report reflect the actual selling price on the day the report is produced.

Observation #6: We noted that the recipient does not have a formal communication process with store managers when changes occur in the program (i.e. eligibility and product changes).

Recommendation #6: The recipient should establish a formal communication process when changes occur in the program to adequately inform its store managers and ultimately clients of program changes.

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.

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 Comment:

In your report you stated that we were not reconciling the weight on our waybill's with that of our invoices. I explained why sometimes the weight on our waybills and the invoices don't match. It is because we ship all nutrition north and non nutrition north items to our stores on the same waybill. But I only claim the weight for what is eligible. I don't scan or submit copies of invoices that are not eligible. For example I might ship 25c/s and only 20c/s are eligible, the total weight on the waybill would be for the 25c/s but you would only see the invoice and claimed weight of the 20c/s.

Recipient's Comment:

You also stated that I don't have a formal communication process with the store managers, which is wrong. I forward information to them all the time. I send them nutrition north information when I get it. I send it by email. I don't have any control if they open or pay attention to it.

Recipient's Comment:

You also stated that I was grouping weights of different products such as bread and hot dog buns under the NNC code. We don't do this with our own product that we make and ship. I only do this with the bread and buns that I bring in for our stores. I order it and it comes in on a truck over the road. We take it right off of the truck and deliver it to the airport, sometimes the boxes are mixed. I check it off and send it. That is why the weights are grouped together. I've already talked to someone about this and they are fine with it because this is the only items it happens with.

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