Compliance assessment report AN Food Distributors Ltd.
For Funding Agreements no. 1213-01-000049 and 1415-HQ-000029 between Aboriginal Affairs and Northern Development Canada and AN Food Distributors Ltd.
100 Queen Street
Ottawa, Ontario K1P 5T8
October 1, 2015
Private and confidential
Aboriginal Affairs and Northern Development Canada
10 Wellington Street
Recipient Compliance Review of the Nutrition North Canada Program
Dear Sir or Madam:
Deloitte is pleased to submit this report which highlights our findings stemming from the compliance assessment of the funding agreement #1213-01-000049 (including amendment no. 0001) and #1415-HQ-000029 between Aboriginal Affairs and Northern Development Canada and AN Food Distributors Ltd. for the Nutrition North Canada program, for the period from April 1, 2012 to September 30, 2014.
If you have any questions with respect to the information contained within this report, please do not hesitate to contact us.
Chartered Professional Accountants
Licensed Public Accountants
1 Executive summary
At the request of Aboriginal Affairs and Northern Development Canada ("AANDC"), Deloitte LLP ("Deloitte" or "we" or "us") performed a compliance assessment of the funding agreement between AANDC and AN Food Distributors Ltd. ("the Recipient") for the Nutrition North Canada program. Nutrition North Canada ("NNC" or the "Program" is a Government of Canada subsidy program to provide Northerners in isolated communities with improved access to perishable nutritious food. NNC is part of the Government of Canada's Northern Strategy. Funding agreements #1213-01-000049, including amendment no. 0001, and #1415-HQ-000029 (collectively, the "Agreement") were signed by both parties on April 10, 2012 and March 27, 2014, respectively. The purpose of the assessment, in accordance with our engagement with AANDC, was to provide information on:
- whether the Recipient is passing on the full value of the subsidy to consumers;
- whether program visibility requirements are met and that the subsidy is transparent to consumers;
- the Recipient's reporting and claiming systems and procedures with regards to gaps and controls issues; and
- whether the Recipient respected program rules in regards to sales to ineligible clients.
The period covered by the compliance assessment is from April 1, 2012 until September 30, 2014. We determined our sample sizes by applying professional judgement based on the frequency of claims and the level of risk associated with the Program.
Our compliance assessment took place from February 9, 2015 to February 13, 2015, at the Recipient's location in Whitehorse, Yukon Territory.
We met with the Recipient to identify and document their key control activities, their procedures and processes related to the use of funds claimed for NNC, program delivery and reporting. We considered the program visibility. We subsequently performed detailed procedures on the accuracy and validity of the Recipient's claims in order to ensure that the Recipient was appropriately passing along the subsidy to the eligible consumer. We did not perform an audit of the claims.
Based on the procedures performed and as more fully described in our report, we identified a number of errors in the samples we selected; we observed that, overall, the Recipient consistently provided higher levels of subsidies to the end customer than was claimed back from AANDC. We also raised the possibility of improvements in the form of recommendations to the upgrade the Recipient's control environment in relation to the Program.
We would like to thank the staff and management of both AANDC and the Recipient for their co-operation.
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2.1 Program information
NNC is a market-driven food subsidy program administered by Aboriginal Affairs and Northern Development Canada ("AANDC") that seeks to make perishable, 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. The Program came into effect on April 1, 2011, replacing the previous Food Mail Program, which was a transportation subsidy program delivered by the Canada Post Corporation on behalf of AANDC.
There are currently 103 communities eligible for the program (84 full and 19 partial), located in Nunavut, 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 food and Level 2 (lower) for other eligible items. Communities where operating and transportation costs are higher are entitled to higher subsidy rates. The subsidy is only applicable to eligible items shipped by air to eligible communities.
Northern retailers and southern suppliers registered with the Program are responsible for managing their supply chain and claiming a subsidy from NNC for eligible food and non-food items that they ship to eligible communities. On a monthly basis, they must submit a claim (kg x subsidy rates), a detailed shipment report (kg per item, community, client type, etc.), invoices and waybills to receive the payment (some 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 funding agreements between the Recipients and AANDC.As of September 22, 2014, NNC has 27 southern suppliers and 8 northern retailers (including 2 country food processors) registered in the program. Northern retailers are those entities that operate food retail one or multiple 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 and Rankin Inlet in Nunavut that transform fish and meat for distribution to eligible communities within the region.
2.2 Recipient information
AN Food Distributors Ltd. is a registered southern supplier located in Whitehorse, Yukon Territory. The Recipient is an airline company which only ships to one community, Old Crow, in the Yukon Territory. The Recipient only provides the shipping services for products between Whitehorse and Old Crow and does not have any discretion in the underlying costs or selling prices of the goods.
On April 10, 2012, AANDC and the Recipient entered into funding agreement no. 1213-01-000049, including amendment no. 0001 which took effect on April 1, 2012 and expired on March 31, 2014. On March 27, 2014, AANDC and the Recipient entered into funding agreement no. 14-15-HQ-000029, which took effect on April 1, 2014 and is scheduled to expire on March 31, 2015. Subject to the terms and conditions of the Agreements, the Minister will make contribution payments to the Recipient for amounts not to exceed:
- $18,000 for the year ended March 31, 2013;
- $18,000 for the year ended March 31, 2014; and
- $21,000 for the year ending March 31, 2015.
AANDC may issue additional payments depending on the circumstances such as reimbursement after the Recipient meets the conditions of payments.
2.3 Purpose and scope
As part of its accountability measures, AANDC must ensure that program recipients comply with the requirements of their respective funding agreements. The Program relies in part upon the practices, processes and procedures that have been adopted by the Recipient. By performing an assessment of selected agreement holders, AANDC will obtain information as to whether that adequate financial control practices are in place and whether that the initiative is managed properly.
AANDC contracted Deloitte to perform a compliance assessment of the Recipient. The objectives of the compliance assessment were to provide the Government of Canada with information on whether the Recipient complied with the terms and conditions of the Agreements. Specifically, our compliance assessment was meant to consider whether:
- The Recipient has administrative controls in place that support compliance with the terms of the Agreements and that they are designed and implemented appropriately;
- The Recipient has financial controls in place that support compliance with the terms of the Agreements and that they are designed and implemented appropriately;
- The Recipient has reporting processes and systems that support compliance with the terms of the Agreements, and that they are designed and implemented appropriately to ensure the Recipient possesses accurate and reliable information in support of their claim-related decision-making; and
- Management practices for the provision of the subsidy to the ultimate consumers are effective and meet the goals of the NNC initiative.
Our procedures addressed all these areas, and our findings and recommendations have been included in our report for AANDC's consideration. The period covered by our procedures relating to AN Food Distributors Ltd. was from April 1, 2012 to September 30, 2014.
3 Approach and Methodology
Deloitte developed a specific approach to assess the Recipient's compliance with the terms and conditions of the Agreements with AANDC, including assessing the design and implementation of financial control practices, reporting, and overall administration of the Nutrition North Canada program to meet the objectives of the initiative.
We obtained the monthly subsidy claims submitted for the period from April 1, 2012 to September 30, 2014. Deloitte conducted an interview on February 9, 2015 with the Recipient's representatives to gain a more in-depth understanding of the organizational practices, processes and methodology in order to assess the risk related to compliance with the Agreements between AANDC and Recipient.
Based on the results of the interview, Deloitte determined a sample size based on the frequency of claims over the period in question through professional judgement.
The compliance assessment took place from February 2 to February 6, 2015. Before arriving on site, Deloitte reviewed the information provided by AANDC and/or the Recipient, including:
- Nutrition North Canada Program – National Manual for Program Recipients (April 2014);
- Contributions to Support Access to Health Foods in Isolated Northern Communities – Terms and Conditions (May 28, 2014);
- Funding Agreement no. 1213-01-000049, including amendment no. 0001 which took effect on April 1, 2012 and expired on March 31, 2014;
- Funding Agreement no. 1415-HQ-000029 which took effect on April 1, 2014 and is expected to expire on March 31, 2015;
- AANDC's general risk assessment of the Recipient (received January 2015);
- Treasury Board Policy on Transfer Payment and the Guide to Grants, Contributions and other Transfer Payments.
Upon review of these documents, Deloitte developed objectives and criteria (as identified in Section 5), which, if met, would allow us to provide information to support AANDC in assessing compliance by the Recipient with the terms and conditions of the funding agreement between the Government of Canada on the basis of the outcome of the particular procedure undertaken.
Deloitte examined certain accounts and records of the Recipient related to the Agreements, and conducted interviews with key personnel of the Recipient who were involved with either the administrative or financial components associated with the implementation of the Agreements. Control activities relevant to the delivery of the NNC program were identified and assessed for evaluating design and implementation only.
Our specified procedures report has been included in Appendix C.
4 Restriction on use of Report
This report is not intended for circulation or publication, nor is it to be reproduced for any other purpose than for the use of AANDC without our prior expressed written permission in each specific instance. We do not assume any responsibility for losses suffered by any party as a result of circulation, publication, or reproduction of this report contrary to the Provisions of this paragraph.
The procedures we performed do not constitute an audit or review engagement and, accordingly, we do not express an opinion or provide assurance in our report.
We reserve the right, but will be under no obligation, to review this report, and if we consider it necessary, to revise our report in light of any information, which becomes known to us after the date of this report.
5 Findings and Recommendations
5.1 Assessment of subsidies and profit margins
The Recipient must ensure that it passes on the full amount of the subsidy to consumers at the time of sale: fully passing on the subsidy means that the entire amount of the subsidy is deducted from selling prices, and that the Recipient is calculating profit margins on the product's "landed cost", net of the subsidy.
The amount of the subsidy is calculated based on the weight (in kilograms) of products shipped by air, multiplied by the specific subsidy rates established by AANDC for eligible communities. There are two levels of subsidy rates – level 1 is a higher subsidy rate, for the most nutritious foods; level 2 is a lower subsidy rate. A detailed list of foods qualifying for either a level 1 or level 2 subsidy rates is maintained by AANDC, and reviewed periodically.
5.1.1 Objective 1: Description of process and methodology used to determine that subsidy is passed to consumers
- The Recipient is an airline company and is only involved in the transportation of eligible products. They do not sell the actual products being shipped. As such, the subsidy is solely applied to transportation costs from Whitehorse, Yukon Territory to Old Crow, Yukon (as Old Crow is the only eligible community served by the Recipient). All goods are transported in passenger planes, i.e. no cargo planes are used.
- Customers purchase the goods from stores in Whitehorse (usually from the Real Canadian Superstore or other similar stores) and bring their orders to the Cargo Office of the Recipient. The Recipient has no discretion in the costs or selling prices of the products purchased and shipped by the customers, as the products are purchased from independent retailers.
- The Cargo Office requires the itemized store receipt with the goods. A copy of the receipt is taken, and the Cargo Agent reviews the individual items, weighs them, and indicates the weight of each eligible item on the receipt copy. The customer retains the original receipt, and the copy is included with the claim submission to AANDC.
- The weight of level 1 and level 2 items is then separately manually calculated, and the NNC subsidy receipt is written up (using the weight values and then the subsidy rates for Old Crow). A carbon copy of the subsidy receipt is provided to the customer for their reference.
- Items with no weight or that are not being shipped, will not have a corresponding weight written next to the item on the receipt. Any ineligible items are weighed separately and not included on the customer's NNC receipt, but are included on the waybill to incorporate into the total shipping cost.
- A flat rate per kilogram is used for all shipments from Whitehorse to Old Crow, from which the subsidy is deducted. This rate is published on the Recipient's website.
- The subsidy calculation is performed by the agent at the Cargo Office, at the same time the waybill is created. The customer receives a receipt that shows the calculation of the subsidy (total level 1 weight, total level 2 weight, multiplied by the subsidy rates, and the total subsidy is directly deducted from the total shipping costs). We were informed that the Cargo Agent receives training on the application of the NNC subsidy, including the identification of eligible and ineligible items.
- After the customer's payment is received, the documents are provided to the accounting department who review the calculations for accuracy. The accounting department reviews the calculations by the Cargo Agents for mathematical accuracy, as well as for eligibility of items claimed, prior to entering the claim for submission to AANDC.
- The subsidy receipts manually generated by the Cargo Agents often contain clerical errors due to a number of factors – transposition errors in manually recording item weights on receipts, incorrect application of subsidy or shipping rates, or improper identification of eligible or ineligible goods. These errors can be to the advantage or disadvantage to the customer; however, most errors we noted resulted in the customer being given a higher subsidy rate than the Recipient was able to claim back from AANDC. See further details of errors in section 5.3.
5.1.2 Objective 2: Examination of recipients’ pricing / invoicing practices in relation to the subsidy, e.g. profit margins on subsidized products vs. unsubsidized products
- See section 5.1.1 for pricing and invoicing practices, including subsidized and unsubsidized products.
5.1.3 Objective 3: Demonstrate that the Recipient is calculating profit margins on the product "landed" cost of a product. For the purpose of this analysis, 'landed’ cost includes product cost + shipping + overhead
- As the Recipient is not responsible for purchasing/pricing the goods, the Recipient does not calculate profit margins on the actual products being shipped (these are purchased from independent retailers); the subsidy is applied solely against the shipping charges.
- The base tariff rate for shipments from Whitehorse to Old Crow is $3.53/kg (plus a fuel surcharge as described below); this base rate is published on the Recipient's website and updated as required (for the scope of the period of our assessment, the shipping rate was consistent).
- The fuel surcharge is assessed monthly and recalculated by the Recipient's management, and adjusted for any fluctuations in fuel prices. The fuel surcharge is an additional percentage of the total weight shipped, and is applied to all shipments made by the Recipient, we did not observe any distinction in the fuel surcharge applied to eligible and ineligible shipments (we identified this cost as part of our testing in section 5.3).
5.1.4 Objective 4: Confirmation from the Recipient that profit margins were analyzed / examined and there is evidence that profit margins are not eroding the subsidy
- See process at Sections 5.1.1 and 5.1.2 related to the profit margin process.
- See process at Section 5.3 for the Recipient's analysis and reporting process.
- The subsidy is fully applied against the freight charges; as such, the subsidy is not eroded.
Conclusion: Our testing supported the design of processes and procedures which allow the subsidy to be passed on to the end consumer; however, we noted a number of errors in the claimed subsidy amounts; see section 5.3 for findings and recommendations.
5.2 Assessment of reporting and claim submission systems and procedures
Under the guidelines set out in the Nutrition North Canada Program – National Manual for Program Recipients, Recipients are required to ensure that the NNC program is visible and the subsidy is transparent to consumers. The requirements differ depending on whether the Recipient is a Northern Retailer, Southern Supplier or Country Food Processor/Distributor. The Recipient in this compliance assessment is a registered Southern Supplier.
Southern Suppliers must clearly identify the amount of the price reduction associated with the subsidy. If instructed, they must also include communication material and other information about the program that has been provided to them by AANDC.
5.2.1 Objective 1: Ensure that the Recipient has established a process to identify the amount of price reduction associated with the subsidy
- See section 5.1.1 for the process related to the price subsidy.
- The Recipient's Cargo Agent makes the decisions on the subsidy level to be used.
- The subsidy level is indicated as "1" for products eligible for the level 1 (higher) subsidy, "2" for products eligible for the level 2 (lower) subsidy.
- The total level 1 weights and total level 2 weights are manually added up from the receipt, onto a specific "Nutrition North" receipt that shows the total weight per level 1 and level 2 separately, as well as the subsidy rate used, and the total subsidy applied.
- The NNC receipt is attached to the waybill receipt (that shows the pre-subsidized cost of freight). The NNC receipt also cross-references the waybill.
- Several errors were noted in the claimed subsidy amounts; see section 5.3.
5.2.2 Objective 2: Ensure that subsidy rates are included on cash receipts and proper in-store signage is displayed
- See comments at section 5.2.1.
- At the inception of the program, some pamphlets were received from AANDC about the Nutrition North program. These pamphlets were put out at the Cargo Office, as well as some were provided to the Vuntut Gwitchen First Nation Band Office (located in Old Crow). No other publicity and/or signage was subsequently received from AANDC.
- As the Recipient is only involved in the transportation of goods, and does not operate a retail location, posters and shelf hangers are not required. The Recipient internally developed posters for the Cargo Office area to advertise the Recipient's participation in the program. The Recipient has also published information relating to their participation in the NNC program on their company website.
5.2.3 Objective 3: Ensure that the Recipient has established an effective and cost-effective supply chain management
- See sections 5.1.1 and 5.1.2 for the process established by the Recipient related to its supply chain management process.
- The only process that the Recipient is involved in is the shipping of goods to Old Crow, Yukon Territory. Most purchases are made at the Real Canadian Superstore in Whitehorse, which is not an eligible northern retailer or southern supplier (as such, it is unlikely that goods are being doubly subsidized).
- The customer is responsible for purchasing their own food/products and getting the goods to the Cargo Office (and picking them up in the community).
The Recipient has limited options for transporting products to Old Crow, based on the types of planes operated and the location of the community. All goods are shipped on passenger flights (no specific cargo flights). While larger and more modern airplanes within the Recipient's fleet may be more cost effective, the volume of flights into the community, passengers and customers does not justify the use of these types of planes. Conclusion: Based upon the sample of items we tested, we observed that the invoicing practices of the Recipient are transparent, whereby the subsidy and freight rates are clearly identified in multiple documents from the point of order initiation through to the final payment/order fulfillment. The Recipient's calculation of the subsidy is directly provided to the end customer for their information and verification, if necessary. The Recipient has also provided any communication material received from AANDC to potential customers.
5.3 Assessment of reporting and claim submission systems and procedures
In order to properly implement and monitor the effectiveness of the delivery of the NNC program, AANDC relies on information submitted by the Recipient. On a monthly basis, the Recipient must submit a subsidy claim form, an itemized food shipment report, and electronic copies of all invoices and waybills associated with the claim. The subsidy claim form must be signed by the Recipient, certifying that the subsidy has been fully passed on to the consumers. The format of the reports is prescribed by AANDC, and templates are provided to the Recipient.
The claim submission and itemized shipment report provides the total weight of items (in kilograms) shipped to eligible communities. The report is broken down by individual NNC item identification number and community. The claim is subsequently submitted through NNC's claim submission software, and each claim is reviewed by a third party claims processor for any deficiencies. Identified deficiencies are forwarded to the Recipient and must be reconciled prior to payment.
5.3.1 Objective 1: Certify that only eligible items are claimed for and reported
- See sections 5.1.1 and 5.1.2 for the process related to eligible and non-eligible items.
- Claims are submitted on a monthly basis by the Recipient.
- The Recipient's accounting staff receives the documentation from the Cargo office and reviews the calculation of the subsidy, and inputs this into the NNC form.
- As the claim is being prepared, the accounting personnel can identify any ineligible items (where a subsidy may have been provided to the customer, but cannot be claimed by AANDC and then this item will not be claimed).We noted that there is no independent review of the overall claim prior to the claim being submitted to AANDC.
- Twenty-seven (27) individual orders (from six different monthly claims) over the thirty-month period of our compliance assessment were selected for detailed testing.
- We noted errors in all monthly claims tested. The sum of errors identified within the claims that were tested in detail represents an over claimed amount of $232.21 (an error rate of 6%). Some of the errors identified through our testing may have also been identified by Crawford and adjusted at the time the original claim was made; as a result, this amount does not represent the actual overclaim paid to the Recipient by AANDC.
- The nature of the errors identified through our testing was as follows:
- Goods were claimed at the wrong weight, and/or were incorrectly entered by the Recipient. We noted several transcription errors between the weights per the supporting receipts and the itemized food reports used to generate the claim – some resulting in over claimed amounts and others resulting in under claimed amounts. To verify the "correct" weight that should have been claimed, we recalculated the expected weight based on the item and quantity purchased (and the reference weights for fruits/vegetables as outlined in Table 3 of the Nutrition North Canada – National Manual for Program Recipients). See details in Appendix B.
- No receipt was available for some goods purchased and claimed. As there were no documents to support the items claimed, we have included the amounts in the summary of errors in Appendix B.
- Goods were claimed under the incorrect category. In most cases, the error in classification related to goods within the same "level" and as a result there was no financial impact on the claim submitted. Where a level 1 product was incorrectly classified as a level 2 product (or vice versa) for purposes of the claim submitted, the difference was noted in the summary of errors in Appendix B.
- A subsidy was provided and claimed on products that do not meet the eligibility criteria as defined in the NNC Program Manual. See details in Appendix B.
- The wrong subsidy rate was applied by the Recipient in the calculation of the customer's subsidized total. Within the twenty-seven (27) orders tested, we identified two (2) instances where the customer's subsidy was incorrectly calculated – one instance used a level 1 rate of $3.53/kg and one instance used a level 1 rate of $2.63/kg. In the first case, the customer received an additional benefit but the Recipient only claimed back the amount at a rate of $2.70/kg (therefore, no impact on the claim). In the second case, the end customer received a slightly lower subsidy but the Recipient claimed the full amount – this was included in our summary of errors in Appendix B.
- We observed several instances of other errors which did not impact the accuracy of the NNC claim, and as such, have not been included in our summary of errors in Appendix B. The nature of these errors observed were:
- Incorrect shipping rates were used. Errors were noted where the end customer was charged both higher and lower amounts than the $3.53/kg rate prescribed. This did not impact the accuracy of the claim to NNC.
- An incorrect weight was charged to the customer by the Recipient (which did not impact the total subsidy claimed; however, resulted in customers being over or under charged).
- Although we observed a number of clerical errors in relation to the claims submitted by the Recipient (resulting in a net overclaimed amount for the specific claims tested), we also observed that for all months within the period of our assessment (with the exception of December 2012), a higher subsidy was granted to the end customer than was claimed back from AANDC. Some of the goods subsidized to the customer relate to ineligible goods for which the Recipient was not entitled to a subsidy; however, we also noted that there were instances of eligible goods shipped that were not claimed. We prepared the following summary to compare subsidies provided to the customer by the Recipient, versus the amount of the subsidy claimed from AANDC:
|Fiscal Year||Subsidy Provided to Customer||Subsidy Claimed by Recipient (excludes monthly administrative fee)||Excess Subsidy Provided and Unclaimed by Recipient|
|2012-2013||$ 12,260||$ 10,996||$ 1,264|
|2013-2014||$ 10,363||$ 8,836||$ 1,527|
|2014-2015||$ 3,467||$ 2,815||$ 652|
|Total||$ 26,090||$ 22,647||$ 3,443|
- As the payment is collected from the end customer at the time the original subsidy is calculated, if a claim is adjusted to remove a subsidy that was incorrectly provided on ineligible products or provided at a higher subsidy rate than prescribed by AANDC, the Recipient absorbs this cost.
We recommend that the Recipient improve its controls over the application of the subsidy in order to ensure the accuracy and validity of claimed subsidies.
We also recommend that the Recipient ensure that an independent review process occurs prior to information being submitted to AANDC, which will increase the quality of the information being provided to AANDC.
5.3.2 Objective 2: Calculate the appropriate weight of items being claimed
- See sections 5.1.1 and 5.1.2 for the process related to ensuring the appropriate weight of items being claimed.
- See results of testing at section 5.3.1 and the exceptions noted.
5.3.3 Objective 3: Ensure that monthly claims and detailed reports are valid and accurate
- See sections 5.1.1 and 5.1.2 for the process related the reporting process implemented by management.
- We noted one instance where the total weight used in the claim submission form did not agree to the total weight of items in the Itemized Food Report (a discrepancy of 133.5 kg, relating to level 1 products). The financial impact of this error resulted in an overclaimed amount of $360.45 being paid to the Recipient by AANDC on the December 2012 claim (which was not included in the summary of errors noted above). This error was not identified by the claims processor.
5.3.4 Objective 4: Demonstrate that controls in place find errors and fix them on a timely basis
- See sections 5.1.1 and 5.1.2 for the process related the reporting process implemented by management, including deficiencies noted related to segregation of duties.
- Notwithstanding the controls that management has implemented, we noted numerous errors in the Recipient's claimed subsidy amount.
5.3.5 Objective 5: Verify that monthly food price reports are accurate (Northern retailers)
- Not applicable; Recipient is not a Northern retailer.
5.4 Assessment of Compliance with Program Terms and Conditions
In addition to the terms and conditions assessed above, there are additional compliance requirements and guidelines that Recipients are expected to adhere to and respect. As part of the initial application process for Recipients to participate in the NNC program, certain eligibility criteria were required to be met. For Southern Suppliers, including the Recipient, these criteria include having a business number with the Canada Revenue Agency, location, and the provision of a list of current or anticipated customers (including Northern Retailers, social institutions and commercial establishments).
The Nutrition North Canada Program – National Manual for Program Recipients specifically disallows Recipients from claiming a subsidy on products sold to or ordered on behalf of resource companies, construction companies and government establishments located in or near eligible communities. Such ineligible companies include, but are not limited to, mining companies, oil and gas companies, electricity companies, environmental cleanup operations, exploration companies and camps, and military establishments and operations. Southern Suppliers are specifically required to inform their clients that they cannot sell and/or ship subsidized items to such restricted organizations and agencies.
Additionally, Recipients can only claim a subsidy on eligible products shipped to eligible communities by air. A subsidy cannot be claimed on products shipped by any other transportation method (ice road, barge, train, transport, etc.).
5.4.1 Objective 1: Ensure that ineligible businesses and establishments do not receive a subsidy
- On the Recipient's website, they specifically list the ineligible customers to whom a subsidy will not be granted. The Recipient stated that they do not ship goods eligible for the subsidy to corporate customers, only individuals.
- The Recipient also stated that they assess the frequency and size of the shipments and can perform a reasonability assessment on the orders to see if the shipments are for the benefit of companies/organizations.
- The Recipient did not provide a subsidy to ineligible businesses and establishments in the sample of claims we tested.
- We also assessed the sample of claims tested to identify whether any customers to whom a subsidy was provided were potentially related parties; we did not identify such parties.
Based on the procedures we performed, several exceptions were noted in the compliance with the program.
We noted the following area for improvement:
- The Recipient should improve its controls over the application of the subsidy in order to ensure the accuracy and validity of claimed subsidies.
- The Recipient should ensure that an independent review process occurs prior to information being submitted to AANDC, which will increase the quality of the review process.
The procedures we performed do not constitute an audit or review engagement and, accordingly, we do not express an opinion or provide any assurance in our report.
AANDC should also note that our assessment relates only to the period from April 1, 2012 to September 30, 2014.
Appendix A – Summary of claim submissions
|Month||Amount of Claimed Subsidy||Selected for Detailed Assessment|
|Total Subsidy Claims||$46,417|
Appendix B – Details of errors in claims identified
|Month/Year||Details of errors on specific items claimed (5.3.1)||Over (Under) Claimed Amount from AANDC|
|April 2012||Subsidy to customer was calculated using an incorrect rate of $2.63/kg for 47 kg of level 1 products. Recipient was reimbursed at correct rate of $2.70/kg.||$3.29|
|Sweetened juices (total weight of 3.46 kg) were claimed as 1-A04 (frozen juice concentrate, unsweetened). Sweetened juices are not eligible to receive a subsidy.||$9.34|
|Seasoned/flavoured popcorn (total weight of 2.88 kg) was claimed as 3-B04 (unseasoned plain popping corn, kernels only). Flavoured popcorn is not eligible to receive a subsidy.||$2.59|
|Chocolate chips/granola bars (total weight of 2.5 kg) were claimed as 3-G01 (baking powder, spices, flavouring and extracts). Neither product is eligible to receive a subsidy.||$2.25|
|Level 1 product with a weight of 0.30 kg per the supporting receipt was incorrectly included in the claim at a weight of 0.40 kg.||$0.27|
|Chicken nuggets (total weight of 0.98 kg) were claimed as 1-D07 (fresh and frozen poultry); however, items that are breaded/battered are not eligible to receive a subsidy.||$2.65|
|Level 1 product with a weight of 0.46 kg per the supporting receipt was incorrectly included in the claim at a weight of 1.46 kg.||$2.70|
|December 2012||Bacon (total weight of 1.05 kg) was claimed as 1-D06 (fresh and frozen meat); however, bacon is only eligible for a level 2 subsidy (2-D01).||$1.89|
|Garlic (total weight of 0.4 kg) was claimed as 3-G01 (baking powder, spices, flavouring and extracts); however, is eligible for a level 1 subsidy (1-A17)||($0.72)|
|Supporting receipts could not be reconciled to the claimed amounts. Claimed amount of 54.3 kg of level 1 products and 15.7 kg of level 2 products could not be traced to underlying receipts (receipts support 21.3 kg of level 1 products and 18.9 kg of level 2 products).||$86.22|
|May 2013||Sweetened juice (total weight of 18.9 kg) was claimed as 1-A04 (frozen juice concentrate, unsweetened). Sweetened juices are not eligible to receive a subsidy.||$51.03|
|Level 1 products (total weight of 17.5 kg) are not supported by store receipts.||$47.25|
|Boxed macaroni and cheese (total weight of 3.4 kg) was claimed as 3-B01 (unseasoned play dry pasta, plain rice and other grains). This product is not eligible to receive a subsidy.||$3.06|
|October 2013||Level 1 products (total weight of 4.05 kg) are not supported by store receipts.||$10.94|
|April 2014||Level 1 product with a weight of 1.05 kg per the supporting receipt was incorrectly included in the claim at a weight of 0.05 kg.||($2.70)|
|Level 1 product with a weight of 1.8 kg per the supporting receipt was incorrectly included in the claim at a weight of 0.8 kg.||($2.70)|
|September 2014||Level 1 product with a weight of 0.4 kg per the supporting receipt was incorrectly included in the claim at a weight of 4.0 kg.||$9.72|
|Level 1 product with a weight of 0.55 kg per the supporting receipt was incorrectly included in the claim at a weight of 1.55 kg.||$2.70|
|Level 1 product with a weight of 1.0 kg per the supporting receipt was incorrectly included in the claim at a weight of 0.1 kg.||($2.43)|
|Level 1 products (total weight of 1.8 kg) are not supported by store receipts.||$4.86|
|Net over (under) claim||$232.21|
|Additional error noted (5.3.3)|
|December 2012||Total weight of level 1 products per NNC claim submission form (417.9 kg) does not agree to the total weight of level 1 products on the Itemized Food Report (284.4 kg).||$360.45|
|Total errors identified from detailed testing procedures||$592.66|
Appendix C – Specified procedures report
100 Queen Street
Ottawa, Ontario K1P 5T8
To: Aboriginal Affairs and Northern Development Canada ("AANDC")
Re: AN Food Distributors Ltd. (the "Recipient")
As specifically agreed, we performed the following procedures in connection to the above Recipient's claims against the Nutrition North Canada ("NNC") Program for the period from April 1, 2012 to September 30, 2014:
- Documented through discussion and observation with the Recipient the process and methodology used to determine how the subsidy is passed to consumers.
- Documented the Recipient's pricing / invoicing practices in relation to the subsidy, on subsidized products vs. unsubsidized products, through discussion with the Recipient as well as testing the subsidy applied to a sample of twenty-seven orders.
- Documented, through enquiry of the Recipient, the Recipient's processes for ensuring program visibility, both in relation to the requirements of a Southern Supplier as outlined in the Agreement as well as any additional measures that the Recipient has taken to promote the program. We tested, on a sample basis, the inclusion of the subsidy calculations and rates on customer receipts.
- Documented, through discussion with the Recipient, supply chain management process, with an emphasis of the effectiveness and cost-effectiveness of the supply chain.
- For a sample of six monthly claims, we:
- Reconciled the total monthly claim to the underlying itemized food report; and
- Recalculated the total itemized food report and recalculated the subsidy and any administrative fees.
- From the sample of six monthly claims, we further sub-selected a sample of twenty-seven orders and:
- Verified the accuracy of the calculation of the total product weights for both Level 1 and Level 2 products, and that these weights matched the weights used to calculate and claim the subsidy, as well as matched the related shipping documents.
- Reviewed the weights of several products claimed within each order for reasonability, using external research or through recalculation of expected weights for fruits/vegetables using the Reference Weights as outlined in the NNC Program Manual.
- Verified against the shipping documents that the selected products were shipped by air into the community (Old Crow) using the correct shipping rate and fuel surcharge as advertised by the Recipient for the NNC Program.
- Verified the Recipient's consistency in the application of the fuel surcharge and other handling fees across NNC and non-NNC shipments through observation of subsidized and non-subsidized shipments occurring during the period.
- For the twenty-seven orders selected, we also:
- Recalculated the expected NNC subsidy based on the product weights and the prescribed Level 1 or Level 2 subsidy rate for the community.
- Compared the expected subsidy to the actual subsidy applied at the point of sale, and calculated any differences from our expectation.
- Verified the identification of subsidized goods and the amount of the subsidy on the store receipts for transparency to the customer.
- Documented the controls designed and implemented by management to identify and correct errors in claims submitted to AANDC.
- Identified, through discussion with the Recipient and review of customer lists and external research, ineligible customers based on the terms of the NNC Program Manual and reviewed transaction information between these customers and the Recipient. We reviewed sales records, where available, to determine if subsidies were being provided to ineligible customers and if the Recipient was claiming a reimbursement for subsidies provided to ineligible customers.
As a result of applying those procedures, we have noted the following deviations:
- There were a number of clerical errors made during the application and claim of the subsidy. The nature of errors include incorrect shipping rates, incorrect subsidy rates, ineligible items claimed, incorrect transcription of product weights from the supporting receipts to the claim form and products classified in the incorrect category. It is likely that the end consumers are receiving a net benefit since it would appear the more subsidies have been provided by the Recipient than are claimed back from AANDC.
- In one instance, the total weight per the Itemized Food Report did not match the total weight used in the calculation of the subsidy per the NNC Claim Submission, resulting in an overclaimed amount.
- The Recipient did not implement an independent review of claims prior to submitting the claims to AANDC.
However, these procedures do not constitute an audit of the Recipient compliance with the Nutrition North Canada Program, and therefore we express no opinion on the Recipient's compliance with the Nutrition North Canada Program.
This letter is for use solely in connection with AANDC's assessment of the Recipient's compliance with the Nutrition North Canada Program.
Chartered Professional Accountants
Licensed Public Accountants
October 1, 2015