Compliance Review Report - North West Company LP

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 the period from 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.

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

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).

Conclusion: The review revealed that the recipient was identifying the subsidy rates on the cash receipts and a poster was visible in the store.

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 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: One of the procedures of the review consisted in ensuring that the recipient's product was identified by the appropriate NNC subsidy code. Our sample review revealed one instance where a product was identified under the NNC subsidy code 1-D06 when it actually should have been 2-FO4. With the assistance of the recipient, we were able to ascertain that for the period from April 1, 2012 to July 31, 2012, the difference in the amount of the subsidy between the subsidy code 1-D06 and 2-F04 resulted in customers receiving $1,199 in excess savings.

Observation Note: As a result of the review, the recipient has made the necessary corrections.

Recommendation #1: We recommend that the recipient review his database to ensure that the appropriate NNC subsidy code reconciles with the NNC eligible products.

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 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; 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 North West Company LP for the period of April 1, 2012 to July 31, 2012. The onsite review was conducted at the offices of North West Company LP in Winnipeg, Manitoba, from September 14 to 19, 2012 and at the St. Theresa Point Northern store on September 20, 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;
  • Onsite visit to the St. Theresa Point Northern 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 objectives of passing on the subsidy, program visibility and the respect of program rules, and has complied with the objective related to claims and reporting with a minor exception 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 in applying the subsidy to the cost of freight reducing the cost of freight on subsidized products.

Conclusion: The review concludes that the recipient is passing on the value of the subsidy 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).

Observation Notes: We visited one of the stores (St. Theresa Point) owned by the recipient and during the walkthrough of the sales floor, it was noted that posters advertising the NNC program are placed strategically in the store. Furthermore, we observed that items displayed small NNC price signs showing the impact of the subsidy on the items' shelf price.

Conclusion: The review revealed that the recipient was identifying the subsidy rates on the cash receipts and a poster was visible in the store.

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 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: One of the procedures of the review consisted in ensuring that the recipient's product was identified by the appropriate NNC subsidy code. Our sample review revealed one instance where a product was identified under the NNC subsidy code 1-D06 when it actually should have been 2-F04. With the assistance of the recipient, we were able to ascertain that for the period from April 1, 2012 to July 31, 2012, the difference in the amount of the subsidy between the subsidy code 1-D06 and 2-F04 resulted in customers receiving $1,199 in excess savings.

Observation Note: As a result of the review, the recipient has made the necessary corrections.

Recommendation #1: We recommend that the recipient review his database to ensure that the appropriate NNC subsidy code reconciles with the NNC eligible products.

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 Report and the Auditor's Response

Recipient's Comments:

All new items listed with the North West Company LP are reviewed for NNC eligibility and classification upon setup. In addition, North West has implemented a process to review all listed products for NNC eligibility and appropriate classification on a regular basis.

Auditor's Response:

No comments required.

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