Compliance Review Report - Newfoundland Multi-Foods Ltd.

Prepared by: Samson & Associates
Date: October 1, 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 review concludes that the recipient is passing on the value of the subsidy to the purchaser of eligible NNC products, except as highlighted below.

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 the consumers' invoice.

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 not adequate to ensure the subsidy being claimed is precise and that the mechanisms to detect and correct errors were in place, as described below.

Observation #1: The Recipient uses the weight indicated on the air waybill to claim the subsidy amounts and pass the subsidy to the consumer. Thus, the recipient respects the program requirement to fully pass on to customers the subsidy it claims from NNC. However, the weight claimed does not reconcile with the detailed shipment report that is also provided to NNC, since the detailed shipment report uses the weight in the accounting system, which is also used for preparing the invoice. The recipient mentioned that the weights were entered some time ago in the system and do not necessarily reflect the actual weight of the products sold.

Recommendation #1: The Recipient should review the weights entered in the accounting system and ensure that the weights claimed to NNC reconcile with weights reported on the detailed shipment report.

Observation #2: The order form and the internal document used to identify the product's level of subsidy and weight (level sheet) are not always kept for reference. Additionally, the level sheets only indicate the weight of the various boxes without reference to what products were included in the boxes.

The amounts claimed for level 1 is determined by taking the total kilograms indicated on the air waybill and subtracting the kilograms for level 2 indicated on the level sheet, which is again not always kept for reference.

This does not provide an adequate audit trail to determine the type of products included in the various levels and the actual product weight claimed.

Recommendation #2: The products indicated on the order form should be referenced to the level form which indicates the amounts of kilograms by level. These documents should also be kept with the invoices for future reference.

iv) Respect of Program Rules

Review Objective: Verify that the 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 the 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 Newfoundland Multi-Food Ltd. for the period April 1, 2012 to July 31, 2012. The on site review was conducted at the offices of Newfoundland Multi-Food Ltd. in Happy Valley-Goose Bay, Labrador from September 21 to 26, 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 as 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

The recipient has complied with the objectives of passing on the subsidy, program visibility and the respect of program rules but has not complied with the objective related to claims and reporting as revealed 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 recipient has instituted procedures to ensure that the value of the subsidy is passed on to customers through lower prices.

Conclusion: The review concludes that the recipient is passing on the value of the subsidy to the purchaser of eligible NNC products, except as highlighted below.

Observation Note: Newfoundland Multi-Foods Ltd. is a southern supplier who receives orders form northern customers by phone or fax. Once an order is taken, it is picked in the 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 the consumers' invoice.

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 not adequate to ensure the subsidy being claimed is precise and that the mechanisms to detect and correct errors were in place, as described below.

Observation #1: The Recipient uses the weight indicated on the air waybill to claim the subsidy amounts and pass the subsidy to the consumer. Thus, the recipient respects the program requirement to fully pass on to customers the subsidy it claims from NNC. However, the weight claimed does not reconcile with the detailed shipment report that is also provided to NNC as the detailed shipment report uses the weight in the accounting system, which is also used for preparing the invoice. The recipient mentioned that the weights were entered some time ago in the system and do not necessarily reflect the actual weight of the products sold.

Recommendation #1: The Recipient should review the weights entered in the accounting system and ensure that the weights claimed to NNC reconcile with weights reported on the detailed shipment report.

Observation #2: The order form and the internal document used to identify the product's level of subsidy and weight (level sheet) are not always kept for reference. Additionally, the level sheets only indicate the weight of the various boxes without reference to what products were included in the boxes.

The amounts claimed for level 1 is determined by taking the total kilograms indicated on the air waybill and subtracting the kilograms for level 2 indicated on the level sheet, which is again not always kept for reference.

This does not provide an adequate audit trail to determine the type of products included in the various levels and the actual product weight claimed.

Recommendation #2: The products indicated on the order form should be referenced to the level form which indicates the amounts of kg by level. These documents should also be kept with the invoices for future reference.

3.4 Respect of Program Rules

Review Objective: Verify that the 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:

The Recipient did provide us with any comments.

Auditor's Response:

No response required.

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