Compliance assessment report Cactus Holdings Ltd. (M&M Meat Shops – Store #427)
For Funding Agreement no. 1213-01-000050 between Aboriginal Affairs and Northern Development Canada and Cactus Holdings Ltd. (M&M Meat Shops – Store #427)
100 Queen Street
Ottawa, Ontario K1P 5T8
October 1, 2015
Private and confidential
Aboriginal Affairs and Northern Development Canada
10 Wellington Street
Gatineau, Quebec K1A 0H4
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 #1213-01-000050 (including amendments no. 0001 and no. 0002) between Aboriginal Affairs and Northern Development Canada and Cactus Holdings Ltd. (M&M Meat Shops – Store #427) 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 the Recipient, Cactus Holdings Ltd. - M&M Meat Shops Store #427 ("M&M" or the "Recipient") in respect of Nutrition North Canada. 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 agreement #1213-01-000050, including amendments no. 0001 and no. 0002, (the "Agreement") was signed by both parties on March 27, 2012. The purpose of the compliance assessment 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 procedures took place from February 2, 2015 to February 6, 2015, at the Recipient's location in Yellowknife, Northwest Territories.
We met with the Recipient to identify and document their key control activities, their procedures and processes related to the claim of funds from 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 did not find any significant deviations in the samples we chose; however, we identified improvements in the form of recommendations toimprove 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 Class Action Services ("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 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 and Rankin Inlet in Nunavut that transform fish and meat for distribution to eligible communities within the region.
2.2 Recipient information
Cactus Holdings Ltd. - M&M Meat Shops Store #427 is a registered southern supplier located in Yellowknife, Northwest Territories. The store is an independently owned and operated franchise, which is part of a large national franchise of food retail stores. The store receives and fills orders for individuals in over 30 eligible communities located in the Northwest Territories and Nunavut (see full list of communities served in Appendix A).
On March 27, 2012, Aboriginal Affairs and Northern Development Canada and the Recipient entered into funding agreement no. 1213-01-000050, including amendments no. 0001 and no. 0002 (collectively, the "Agreement") which took effect on April 1, 2012 and is scheduled to expire on March 31, 2015. Subject to the terms and conditions of the Agreement, the Minister will make contribution payments to the Recipient for amounts not to exceed $52,927 for the fiscal year ending March 31, 2013 and $60,000 for each of the fiscal years ending March 31, 2014 and March 31, 2015 as part of the Nutrition North Canada initiative, for a total maximum amount of funding of $172,927 over a three-year period.
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 to support that adequate financial control practices are in place to ensure 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 Agreement. Specifically, our compliance assessment was meant to consider whether:
- The Recipient has administrative controls in place that support compliance with the terms of the Agreement and that they are designed and implemented appropriately;
- The Recipient has financial controls in place that support compliance with the terms of the Agreement and that they are designed and implemented appropriately;
- The Recipient has reporting processes and systems that support compliance with the terms of the Agreement, 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 for the Recipient is from April , s2012 until 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 Agreement 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 2, 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 Agreement between AANDC and the 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 judgment.
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 #1213-01-000050, including amendment no. 0001 and no. 0002 between Aboriginal Affairs and Northern Development Canada and Cactus Holdings Ltd. (M&M Meat Shops – Store #427), effective April 1, 2012
- AANDC's general risk assessment of the Recipient (received January 2015)
- Deloitte Audit Approach Manual
- 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 assess compliance by the Recipient with the terms and conditions of the funding agreement between the Government of Canada and the Recipient on the basis of the outcome of the particular procedure undertaken.
Deloitte examined the accounts and records of the Recipient related to the Agreement, 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 Agreement. Control activities relevant to the delivery of the NNC program were identified and assessed for 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 ships eligible products from its warehouse in Yellowknife, Northwest Territories to communities in the Northwest Territories and Nunavut (see Appendix A for list of eligible communities). The majority of shipments are for meats, fruits and vegetables, as well as some ready-made ("combination") foods such as premade lasagnas. The majority of goods shipped qualify for the level 1 subsidy although there are some level 2 subsidy goods, as well as some ineligible goods. Through enquiry with Recipient representatives, we understand that none of the customers are related parties.
- Orders are submitted by individuals – there are some ‘group' orders (i.e. for school programs or for use in community cooking classes). Orders are mainly submitted by email (the occasional order is submitted by fax or over the phone). The order is filled with goods from the store (more is ordered if necessary), so shipments are made to the various communities on a continuous basis.
- Shipping costs are based on kilograms shipped. Each community has a pre-determined freight rate (which is paid by the customer), and this rate is shown on the order form. The rates are revised approximately every 6 months (in general, they have increased since the inception of the program due to rising fuel costs).
- First Air is used for most of the shipments (Buffalo and Air Tindi are also used for areas which are not serviced by First Air).
- We were informed that Canadian North was used at the beginning of the program, but the rates were too expensive (i.e. First Air costs are less).
- Based upon enquiry with the Recipient, while rates were negotiated with all airlines (First Air, Air Tindi, Buffalo, and Canadian North) to provide the goods; no official quotes were received from any airlines.
- We reviewed the costs of cargo shipments for various airlines shipping out of Yellowknife based on information publicly available on the airlines' websites, where available, and compared the shipping costs to the freight rates charged by the Recipient to NNC customers. We noted that based on the information available, the shipping rates negotiated by the Recipient with First Air are lower than all other airlines where price data was available.
- The food items are shipped as cargo on passenger flights into the community; most communities are not road-accessible for all or most of the year; even with winter roads, the perishability of the goods makes it difficult to send goods (and maintain the same quality) using any other method than air.
- The prices to the end consumer in the communities are the same prices charged to individuals who would purchase the items directly from the store.
- The prices for goods are posted online, as well as in flyers.
- The people in the eligible communities are also eligible for the sale prices and any special offers available in the flyers/in-store; any coupons are also honored.
- As a franchise, the prices are set by the head office (local staff cannot change the prices of goods in the store, and cannot control the margins earned).
- For people in eligible communities, the price of the goods is the same as the price in the store, plus the shipping costs, less the subsidy. Management advised us that the owners of the franchise do not set the prices in-store. The franchise sets them.
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
- Flyers are sent via email on a regular basis to customers in eligible communities. Prices are also available on the M&M website.
- In-store staff will fill the order once received. Typically the order can be filled with goods on hand; depending on the volume ordered, additional stock can be ordered from the warehouse to fill the order.
- Prices to the communities are consistent with prices in the store. Additionally, the communities are eligible for sale prices, coupons, special offers, etc. that are offered in the flyers (the same as people who physically come into the store).
- The order forms include the standard shipping rates for the particular community. The end customer is also responsible for paying the shipping charges.
- Customers must pay for their order, including the shipping charges, prior to an order being filled and sent. Most payments are done online (via credit card, or Electronic Fund Transfer).
- For each order a reconciliation template is used to convert the information in the order form into information that can be inputted into the NNC template. This reconciliation breaks down the orders into main categories (chicken, beef, pre-made meals, etc.) and calculates the total weight and calculates the subsidy.
- The order is processed through the till and a receipt is generated (in place of an invoice). The receipt also shows the shipping and subsidy (level 1 and level 2) for each order.
- The franchise co-owner reviews these at the end of every month to ensure they are accurate, as staff is often responsible for filling the individual order forms. Any errors noted are identified and corrected for the claim submission.
- The store does sell and ship to "ineligible customers" (such as mining or oil companies); however, the subsidy is not applied. They would pay full prices, and will often arrange their own shipping.
- The eligible goods are distinguished on both the order forms and the reconciliations (there is a column that shows the subsidy level – either 1, 2 or "C" for cargo (ineligible)) so that customers are aware, as well as the calculation of the subsidy is done correctly.
M&M generally receives new items in the spring and fall – based on experience with the Program, they are aware of items that would definitely be considered ineligible (such as any breaded items) – however, if there are items that are up for debate, the co-owner will communicate with Crawford representatives to get an assessment of the eligibility (a "pre-approval")
- If a new item is considered eligible, the new item will be added to the reconciliation and order form accordingly.
- The order forms, as well as the reconciliations (developed by M&M) are ‘locked' – meaning that the underlying formulas (which include the rates) cannot be altered.
- We reviewed on a sample basis, the sales orders placed for the period under assessment; we did not identify any overly large orders that would suggest bulk orders that are being placed for corporate/ineligible customers.
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
- Prices for products are set by the head office (M&M Meat Shops Store #427 is just one franchise location); the franchisee does not have any input into prices charged.
- All goods are purchased from M&M's warehouse in Calgary (all products are branded and must come from the same source); this is the cost that the Yellowknife franchisee pays. The profit margin would be the selling price, less the cost (which incorporates shipping cost). The calculation of the end sales price (and thus any profit) to the final consumer would therefore be:
- Cost of Goods (purchased from head office) + shipping + handling fee – subsidy
- As detailed in section 5.1.1, the same prices are charged to Nutrition North Canada (NNC) customers that are charged to the actual in-store customers.
- Prices of the goods remain stable throughout the year – they are generally reviewed every 6 months. Sometimes, prices of the goods may be altered due to specific economic conditions or availability.
- In other cases, the size of the goods may be adjusted (for example, the price of a bag of frozen vegetables may remain stable over time, but the weight of the bag may be changed).
- The administrative fees are automatically calculated by the Crawford software (Crawford Class Action Administration Database System, or "CAADS"), based on the terms and conditions of the funding agreement (a different amount of administrative fees are calculated depending on the dollar value of the monthly claim as per the Agreement).
- The only difference between sales to in-store customers versus sales that are air shipped to customers is that M&M charges a "handling" fee as follows:
- Orders less than $75 = $15 handling fee
- $76-$150 = $20 handling fee
- Orders greater than $150 = $25 handling fee
We noted as part of our sample testing that this handling fee is applied to all orders which are air-shipped to communities (whether eligible for the NNC subsidy or not); and therefore, is not exclusively related to the NNC program.
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.
- The Recipient has established processes and procedures which allow the subsidy to be passed on to the end consumer.
- For the sample of items tested, the subsidy is fully applied to the freight charges; as such, the subsidy is not eroded.
5.2 Assessment of program visibility and transparency
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 review 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
- The Recipient receives personal orders from individual members of eligible communities. Orders are primarily submitted online (via email).
- The Recipient has standardized order forms and subsidy calculation forms which are used to fill NNC orders. The store's cash register was also programmed to be able to specifically indicate the total level 1 and level 2 subsidies.
- The eligibility of each individual product for the NNC subsidy is indicated directly on the order form, so the customer is informed at the time of the order.
- When the order is filled, the customer is also provided with copies of the NNC subsidy calculation and cash register receipt (summarizing the total purchase, including freight, subsidies, and handling fees), which clearly indicate the rates used and provide the calculation of the subsidy.
- The Recipient has also developed a standard letter that is provided to all new customers, which confirms that the store is a registered Southern Supplier in the NNC program, and provides a link to the Nutrition North website for additional information.
- The letter also provides details on the NNC program overall, as well as how the program is specifically administered by the store (providing details on ordering, payments, and how the subsidy is calculated).
- Additionally, the Recipient provides store flyers to the eligible communities served and includes information about the NNC Program on social media (Facebook). The Recipient has also advertised their involvement in the NNC program in community newspapers.
- At the onset of the NNC program, AANDC provided the Recipient with a small number of informational pamphlets (approximately 50).
- All of these pamphlets were included with NNC customer orders that were fulfilled by the Recipient. No other communication material, to be provided to customers, has been subsequently developed by AANDC.
5.2.2 Objective 2: Ensure that subsidy rates are included on cash receipts and proper in-store signage is displayed
- The Recipient has developed a standardized order form which customers use to submit their food orders. The order form lists the name of each product, the weight, the regular price and the associated subsidy level for each product.
- 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, and "C" for cargo products (products that are not eligible for a subsidy). This legend is clearly written on the order form.
- From the order form, the data is inputted into a reconciliation form, which summarizes the weight of the level 1, level 2 and cargo products ordered.
- The reconciliation form also clearly indicates the level 1 and level 2 subsidy rates for the specific destination, as well as the freight rate.
- The form shows the total weight, rates, and calculation of the subsidy (note that that the form is subsequently used by the Recipient to populate the monthly claim submitted to NNC), and a copy is also provided to the customer to show the reconciliation of the subsidy and freight on their order.
- Finally, the customer also receives a cash register receipt which summarizes the total cost of their order. The receipt also summarizes and clearly indicates the total freight, total level 1 subsidy and total level 2 subsidy. The amounts on the receipt are matched to the reconciliation (above) to ensure the accuracy of the calculations.
- As most orders are completed online, no store signage is displayed; please refer to section 5.2.1 for additional information.
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.
- Twenty (20) individual orders (from six different monthly claims) over the thirty-month period of our compliance review were selected for detailed testing. All 20 selections were shipped by air into the eligible communities with no exceptions identified.
- Based on interview discussions with the Recipient, they do not use any alternative methods to ship goods into the eligible communities (given the perishability of goods and the time taken to ship by land/water, air is the most effective and efficient method).
- 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 the 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.
- Twenty (20) individual orders (from six different monthly claims) over the thirty-month period of our compliance review were selected for detailed testing. All 20 selections were eligible products in accordance with the detailed list of eligible items per Appendix B, Table 2 in the Nutrition North Canada Program – National Manual for Program Recipients. No exceptions were noted.
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 eligible and non-eligible items.
- Twenty (20) individual orders (from six different monthly claims) over the thirty-month period of our compliance review were selected for detailed testing. The products in each of the 20 selections were physically observed in the store and were re-weighed to verify that the weight per the order forms and itemized food reports appropriately reflected the weight of the actual products. No exceptions were noted.
- In some cases, at the date of fieldwork, previously claimed products had been subsequently discontinued or re-packaged. A reasonability assessment for such products was conducted using the weight of substitute products or through a pro-ration calculation (if quantities or sizing of the product had changed over time).
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 to eligible and non-eligible items.
- Twenty (20) individual orders (from six different monthly claims) over the thirty-month period of our compliance review were selected for detailed testing. All 20 selections were recalculated to verify accuracy of the claim submitted, and traced to the detailed itemized food shipment report and monthly claim. No exceptions were noted.
- All items claimed were matched to products in the Recipient's current inventory or prior inventory records (for discontinued products) to ensure the validity of items claimed.
5.3.4 Objective 4: Demonstrate that controls in place find errors and fix them on a timely basis
- At the end of the month, the co-owner inputs the data from the reconciliations into the CAADS system to submit the claims.
- Throughout the month, the invoices are matched with the airline waybills (customer name, products, weight shipped, freight charged). Any discrepancies are identified. If there is an error where the customer has overpaid, a credit will be issued to the customer. If the error results in the store having undercharged the customer, they must absorb this loss.
- The reconciliation sheets with the built in formulas help to ensure the accuracy, as the formulas cannot be altered by anyone (intentionally or accidentally).
- The co-owner enters the claim and reviews the reconciliations to identify any errors in invoices (usually an error on the order form – a calculation error, human error). 1-2 errors are identified by the Recipient per month; there is no independent review process of the claims submitted to AANDC.
- When the claims are input, the co-owner also ensures that the subsidy rates in the CAADS system are in line with the rates that are built into the reconciliations.
5.3.5 Objective 5: Verify that monthly food price reports are accurate (Northern retailers)
- Not applicable; the 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
- The Recipient does not maintain a master customer list; however, the documentation for all sales shipped by air are separated as either NNC or non-NNC order. Pursuant to enquiry of the Recipient, they are aware of the types of restricted customers, and from sales experience, would be able to identify any large bulk purchases that could indicate the intent to re-sell or larger corporate orders. Additionally, the Recipient has confirmed they do not provide or claim the subsidy on in-store sales (as the store's physical location in Yellowknife is not considered an eligible community).
- The Recipient noted that the only sales where the subsidy was applied and claimed that were made to groups were for school food programs or community cooking classes, which are not considered restricted customers and are eligible for the subsidy.
- Through our review of a sample of monthly claims, we observed that all orders were made by and shipped to individuals and did not identify any ineligible customers from the claims tested. However, the Recipient does not further inform its customers that they cannot sell and/or ship subsidized items to restricted organizations.
- We also reviewed the Recipient's documentation for non-NNC sales to observe whether it appeared any subsidies were being granted (that could be part of the monthly claims). We noted that most non-NNC sales were to territorial/municipal government organizations, to customers who arranged their own shipping (such as airline employees who receive free or discounted shipping, or shipments on RCMP planes to various stations throughout the North), as well as several corporate customers. From the orders reviewed, none of the non-NNC sales documentation included the provision of a subsidy that would suggest the Recipient may be claiming ineligible sales.
Recommendation: While the Recipient does not maintain a master customer list, we did not observe any instances through our testing that suggests the Recipient is providing and claiming a subsidy on sales to ineligible customers; however, we recommend that the Recipient inform its clients in writing that they cannot sell and/or ship subsidized items to restricted organizations.
Recommendation: We did not identify any errors in the information produced by the Recipient and provided to AANDC; however, we did note that there is a lack of segregation of duties in the Recipient's reporting process as there is no independent review of claims prior to being submitted to AANDC.
The Recipient should ensure that an independent review process occurs prior to information being submitted to AANDC, which will increase the quality of the information provided to AANDC.
Based on the procedures we performed, no exceptions were noted in the compliance with the program.
We did note, however, the following areas for improvement:
- The Recipient should ensure that an independent review process occurs prior to information being submitted to AANDC, which will increase the quality of the information being received by AANDC.
- The Recipient should formally advise its clients that they cannot sell and/or ship subsidized items to restricted organizations.
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 to the period from April 1, 2012 to September 30, 2014.
Appendix A – Eligible communities
The table below identifies the NNC-eligible communities which were served by the Recipient during the scope of our compliance assessment.
|Colville Lake||Northwest Territories|
|Fort Good Hope||Northwest Territories|
|Gameti (Rae Lakes) [partial eligibility]||Northwest Territories|
|Lutsel K'e [partial eligibility]||Northwest Territories|
|Norman Wells||Northwest Territories|
|Sachs Harbour||Northwest Territories|
|Trout Lake||Northwest Territories|
|Ulukhaktok (Holman)||Northwest Territories|
|Wha Ti [partial eligibility]||Northwest Territories|
Appendix B – Summary of claim submissions
|Month||Amount of Claimed Subsidy||Selected for Detailed Review|
|April 2012||$ 3,242|
|May 2012||$ 2,906|
|June 2012||$ 3,677|
|July 2012||$ 3,221|
|August 2012||$ 4,887||X|
|September 2012||$ 3,904|
|October 2012||$ 4,309|
|November 2012||$ 3,104|
|December 2012||$ 7,359||X|
|January 2013||$ 4,358|
|February 2013||$ 4,951|
|March 2013||$ 6,985|
|April 2013||$ 7,337|
|May 2013||$ 4,185|
|June 2013||$ 3,550|
|July 2013||$ 1,315|
|August 2013||$ 5,378|
|September 2013||$ 5,366|
|October 2013||$ 5,471|
|November 2013||$ 6,435||X|
|December 2013||$ 5,897|
|January 2014||$ 5,775|
|February 2014||$ 5,356|
|March 2014||$ 4,043|
|April 2014||$ 6,461|
|May 2014||$ 6,406||X|
|June 2014||$ 4,427|
|July 2014||$ 3,167|
|August 2014||$ 5,302|
|September 2014||$ 6,414||X|
|Total Subsidy Claims||$ 145,188|
Appendix C – Specified procedures report
100 Queen Street
Ottawa, Ontario K1P 5T8
To: Aboriginal Affairs and Northern Development Canada ("AANDC")
Re: Cactus Holdings Ltd. (M&M Meat Shops – Store #427) (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 practices in relation to the subsidy, through discussion with the Recipient as well as comparing on sample basis, subsidized products vs. unsubsidized products. We also tested three randomly selected items from the order form for NNC eligible customers and verified the prices against the store's website to ensure the consistency of prices of the same products sold to non-NNC eligible customers both online and in the Yellowknife store location.
- Documented the Recipient's process to identify the amount of price reduction associated with the subsidy. We assessed the Recipient's internally-generated order form and subsidy reconciliation templates for mathematical accuracy in relation to the calculation of the total order and total subsidy. We also reviewed that the items on the order form were appropriately classified as Level 1, Level 2 or Cargo (ineligible) goods, in line with the NNC Program Manual.
- Documented through enquiry of the Recipient the processes implemented to ensure program visibility, both in relation to the requirements outlined in the Agreement as well as any additional measures that the Recipient has taken to promote the program. We observed the communication materials prepared by the Recipient in relation to the NNC program. We tested, on a sample basis, the inclusion of subsidy calculations and rates on cash receipts.
- Documented the Recipient's supply chain management process through enquiry of the Recipient, with an emphasis on the effectiveness of the supply chain. Additionally, we obtained the schedule of freight rates negotiated between the Recipient and the airlines and compared these rates to shipping rates published on the airlines' websites as well as other regional airlines (as of the date of fieldwork) to assess the cost-effectiveness.
- 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 individual orders and:
- Verified the products were shipped to an eligible community (through verification of shipping documents and comparison to the NNC Program Manual);
- Recalculated the total individual order, including the total Level 1 and Level 2 subsidies, and traced the total of the individual order to the overall monthly claim;
- Traced the total weight from the order form to the shipping documents and the NNC reconciliation and calculation of the subsidy.
- Verified that the Level 1 and Level 2 subsidy rates applied for each selected community were consistent with the rates prescribed by AANDC;
- Traced the total weight from the order form to the shipping documents and the NNC reconciliation and calculation of the subsidy; and
- Verified the shipping rate used to calculate the customer's total purchase cost was in agreement with the standard freight rates as negotiated between the Recipient and airline.
- From the twenty individual orders, we sub-selected one specified item from each (twenty items in total) and:
- Verified the price agreed to the order form and receipts; and
- Recalculated the weight of the item and compared this to the weight per the order form (which is used to calculate the subsidy)
- Documented the controls designed and implemented by management to identify and correct errors in claims submitted to AANDC.
- Documented through enquiry of management the process to identify potentially ineligible customers. We also reviewed the orders from the sample of monthly claims in procedure 7 for any ineligible customers, and reviewed a sample of non-NNC eligible orders to observe whether a subsidy was provided to any ineligible customers or to in-store orders.
As a result of applying those procedures, we have noted the following:
- Based on the results of procedure 9, we observed that the Recipient did not implement an independent review of claims prior to submitting the claims to AANDC, and
- The Recipient does not formally advise its clients that they cannot sell and/or ship subsidized items to restricted organizations, as part of our observations in procedure 4.
However, these procedures do not constitute an audit of the Recipient's compliance with the Nutrition North Canada Program or the Agreement, and therefore we express no opinion on the Recipient's compliance with the Nutrition North Canada Program or the Agreement.
This letter is for use solely in connection with AANDC's assessment of the Recipient's compliance with the Nutrition North Canada Program.
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