Compliance assessment report North West Company
For Funding Agreement no. 1213-01-000019 between Department of Aboriginal Affairs and Northern Development Canada and the North West Company
100 Queen Street
Ottawa, Ontario K1P 5T8
November 17, 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 funding agreement #1213-01-000019 (including Amendments no.001 and no.002) between Aboriginal Affairs and Northern Development Canada and the North West Company (NWC) for the Nutrition North Canada program, for the period from April 1, 2013 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 North West Company (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 #1213-01-000019, (including Amendments no.001 and no.002) (the "Agreement") was signed by both parties on March 30, 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, 2013 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 Project. Our compliance assessment took place from February 23, 2015 to February 27, 2015, at the Recipient's headquarters in Winnipeg, Manitoba. Our compliance assessment was restricted to the eligible communities under the program over the time period covered by the compliance assessment. . As a result, certain procedures that may have been possible to conclude on the Recipient's compliance were not available to us as a result of these limitations on the scope of our work.
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 audit 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.
We received the full support of the Recipient during this audit.
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 to improve 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 3 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, Rankin Inlet and Pangnirtung in Nunavut that transform fish and meat for distribution to eligible communities within the region.
2.2 Recipient information
The North West Company (the "Recipient") is a registered northern retailer located in Winnipeg, Manitoba. The Recipient is a publicly traded retailer to underserved rural communities and difficult to reach locations across Canada and the Caribbean. The Recipient receives and fills orders for 67 eligible communities located across Manitoba, Saskatchewan, Yukon, the Northwest Territories, Nunavut, Ontario and Quebec (See full list of communities served in Appendix A).
On March 30, 2012, AANDC and the Recipient entered into funding agreement no. 1213-01-000019, including Amendments no.001 and no.002 (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:
- $31,777,811 for the year ended March 31, 2013;
- $31,693,000 for the year ended March 31, 2014; and
- $24,000,000 for the fiscal year ending March 31, 2015.
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. Given that the Program relies in part upon the practices, processes and procedures that have been adopted by the Recipient, 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 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 considered all these areas, and our findings and recommendations have been included in our report for AANDC's consideration. The period covered by our procedures was from April 1, 2013 to September 30, 2014. Our compliance assessment was restricted to the eligible communities under the program over the time period covered by the compliance assessment. . As a result, certain procedures that may have been possible to conclude on the Recipient's compliance were not available to us as a result of these limitations on the scope of our work.
We received the full support of the Recipient during this audit.
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, 2013 to September 30, 2014. Deloitte conducted an interview on February 24, 2015 with the Recipient's representatives to gain a more in-depth understanding on the organizational practices, processes and methodology in order to assess the risk related to compliance with the funding 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 judgement.
The table below summarizes the maximum funding per the Agreement by fiscal year, as well as the funds claimed by the Recipient and received from AANDC. A detailed listing of the subsidy claimed each month, including the specific claims tested, is in Appendix B.
|Fiscal Year||Maximum Funding for Nutrition North Canada program per Agreement||Funding Amount Claimed and Received from AANDC|
|[Note 1]: The scope of our compliance assessment period only covers up to September 30, 2014; as such, the funding claimed and received for the fiscal year only represents a six month period.|
|April 1, 2013 – March 31, 2014||$31,693,000||$32,554,894|
|April 1, 2014 – March 31, 2015||$24,000,000||$16,424,966 [Note 1]|
The compliance assessment took place from February 23, 2015 to February 27, 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 #1213-01-000019 (including Amendments no.001 and no.002) which took effect on April 1, 2012 and is scheduled 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 certain information to support AANDC in assessing compliance by the Recipient with the terms and conditions of the contribution agreement between the Government of Canada and the Recipient on the basis of the outcome of the particular procedure undertaken.
Deloitte examined certain 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 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 determined the best method to apply the subsidy and ensure it is being passed on to the consumer was to apply it directly to the freight costs.
- All retail prices are determined by applying a mark-up to the cost of the item and then adding the freight costs net of the subsidy. The mark-up is determined by the Category Manager and is subject to fluctuation based on a number of internal and external factors such as market conditions, changes in operating costs (wages, utilities and other expenses) and so forth
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
- The Recipient's pricing/invoicing practices are all automated and are customized to the criteria set by the Nutrition North Program Manual. Retailers have access to a merchandise management system and the ordering/invoicing is automated. A purchase order is created through the system and will either be directly sent to suppliers based on products ordered, or will go through internal warehousing. All purchase orders are matched to invoices to validate the accuracy and completeness of the order as part of the reasonableness check in building the claims.
- Pricing is determined by the Item Maintenance & Pricing group. Prices are subject to change based on the supplier costs; the Pricing Manager will make the necessary changes within the Company's merchandise management system and pricing system; similarly, changes to freight rates are monitored by the Transportation department, who update freight rates and provide the information to the Pricing group to update the pricing system and the merchandise management system.
- Database management (which includes changes to the database's information) is done regularly. The Recipient also provides a monthly food pricing report prior to submission to AANDC.
- The pricing/invoicing in relation to the subsidy is contingent on the constant updates from the Item Maintenance group, which is ultimately responsible for the modifications in product coding, categories, pricing, weights, shipping and so forth, to ensure that the subsidy will ultimately be applied if it is eligible.
- A sample of 75 items was tested to gain comfort over the invoicing and pricing practices that are currently in place, in relation to the subsidy see 5.2.1.
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
- The Recipient determined that the best method to apply the subsidy and ensure it is being passed on to the consumer was to apply it directly to the freight costs.
- All retail prices are determined by applying a mark-up to the cost of the item and then adding the freight costs net of the subsidy. The mark-up is determined by the Category Manager and is subject to fluctuation based on a number of internal and external factors such as market conditions, changes in operating costs and so forth.
- The retail method calculation by the Recipient is described below through a simple example.
|Product Z||WITHOUT SUBSIDY||WITH SUBSIDY|
- As the example illustrates, margins remained the same in both circumstances. The subsidy is deducted after calculating the markup on the product and supports the contribution agreement requirement which states "selling prices are reduced by the amount of the subsidy". Example A illustrates the Retail price on Product Z is reduced from $4.50 to $3.50 demonstrating the subsidy has been fully passed on.
- One approach to determining whether the subsidy was passed along to consumers is to evaluate the pricing of goods sold with a subsidy to pricing of goods sold without a subsidy in the same community. We were unable to make this comparison as the scope of our review did not allow us to compare pre-program prices or, as we were advised, such transactions did not exist. Consequently, our procedures compared the sales prices on subsidized items at the point of sale to the sales prices in the merchandise management system. This comparison has an inherent limitation as the pricing in a particular community is subject to change from the merchandise management system due to local market conditions and other factors and may not be equivalent to what a particular item would be sold for on an unsubsidized basis in that community. We noted that, for the most part, pricing and margins on product decreased from the merchandise management system pricing to the community pricing. NWC management confirms that the methodology used to determine retail prices ensures the subsidy has been fully passed on. We agree that management's approach to pricing would ensure that all of the subsidy is passed along to the recipient and we can confirm that the subsidy has been deducted from the retail price. Unfortunately, we cannot compare the margins on subsidized product to unsubsidized product as there were no instances of unsubsidized product being sold in eligible communities and the scope of our audit did not include pre-program transactions that would have allowed us to consider pre-program pricing.
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
- As noted in section 5.1.3, the Recipient's pricing methodology deducts the subsidy in full in the calculation of the retail price. To ensure the subsidy is not eroded, the Recipient now prepares a margin analysis to assess the decrease in the margin since the introduction of the Nutrition North Program. These analyses are performed on a quarterly basis and will take into account any business operation changes and pricing changes for NNC eligible products.
- The margin analysis provided by the Recipient was completed in December 2014 which was beyond the timeframe under audit.
- The Recipient calculated an overall margin based on identical products sold pre-NNC and still currently sold. When comparing the March 2011 margins (i.e. prior to the implementation of the NNC Program) to the most recent analysis as at December 2014, the overall margin decreased. The analysis compared identical product margins over the last four quarter sales. Therefore, North West Company concluded that the subsidy is not eroded and is being passed on to the end consumer. We did not audit or perform procedures on these analyses as they were outside the time period for which we were engaged to perform audit procedures.
- As part of our 75 item test, for any items that were sold prior to the introduction of the subsidy (34 items) we recalculated the Recipient's margin on these sales and compared the margin to the March 2011 margin reported in the margin analysis (unaudited) to assess whether a change in margin was eroding the subsidy.
- We would expect the margins earned prior to the introduction of the NNC Program and the margins earned after introduction not to have changed, except for changes in costs and other external market related factors. We noted the decrease in margin in individual products tested which is a strong indicator that subsidy is reducing the costs of products to end consumer. While there were a few specific examples in the basket of 34 items where margins increased, on average, the margins for the basket of 34 items/products were either stable or decreased from March of 2011 to December of 2014.
- See other observations in sections 5.1.1 and 5.1.2 with respect to pricing practices.
5.2 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 provide 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.
5.2.1 Objective 1: Certify that only eligible items are claimed for and reported
- Every item added to inventory is evaluated for its eligibility. The Recipient has implemented the following processes to ensure the validity, accuracy and completeness of the monthly reports:
- The Item Maintenance group is responsible for entering every inventory item (both subsidized and non-subsidized) in the merchandise management system and the pricing system, which includes the category, a description of the item, the gross weight, the NNC code, case quantity, cost and retail price.
- Updates and modifications made are subject to approval and sign-off on a needed basis by the Category Manager. We assessed the design and implementation of said control and noted the control to be properly implemented.
- The merchandise management system provides the options of editing Store and Item Attributes which are used to modify the eligibility of communities and products, in addition to the level of subsidy applicable.
- Items are labeled with a NNC Item Code to determine eligibility and level upon auto-ordering process in the merchandise management system. NNC eligible communities will be automatically identified by the coding from the store ordering; similarly, the products ordered will be flagged as being eligible (or not) for the subsidy.
- As the ordering process is automated, each purchase order is ultimately matched to an invoice and ensures that all items on the purchase order adhere to eligibility prior to be subsequently claimed.
- Since the items are identified as eligible or ineligible in the merchandise management system (items with a NNC code are eligible), the system automatically generates a report of all the subsidized items ordered in the period and ultimately reconciled to the itemized claim report provided to Crawford (the claims processor) to ensure all items sold are being claimed. The reasonableness check is done by the Commodity Tax Administrator, Finance throughout the preparation of the claims and prior to being submitted to Crawford.
- For the eighteen-month period under assessment, we examined the design and the implementation of the various controls associated with the NNC program. Controls established by the Recipient around the NNC product information are as follows:
- Reasonableness checks on weights, SKUs, quantities, prices.
- New item set-up, discontinued items, changes in items listing,
- Product exception report generating.
- We tested on a sample basis the claims submitted to AANDC:
- We selected 6 monthly claims and from each of these monthly claims sub selected 2 communities and a total of 75 individual products throughout the 18 month period under examination.
- Each individual item selected was traced from the itemized food report to its respective invoice from the supplier, the weight listing, the freight listing and ultimately the retail prices (per the merchandise management system and at point-of-sale). The point-of-sale price was confirmed by examining a receipt which showed the price charged to the end customer.
- Based upon the samples tested, no significant errors were found in the calculation of the subsidy (we noted minor errors totalling $85 on an amount tested in total of $16,475).
- Based upon the sample tested, no errors were noted in the eligibility of products.
5.2.2 Objective 2: Calculate the appropriate weight of items being claimed
- Item weights are all provided by the suppliers and entered into the merchandise management system and the pricing system by the Item Maintenance group. Items and their weights are standardized per supplier; therefore the Recipient inputs the data into the system for their automated order process.
- A weekly report is generated by the Pricing Manager in conjunction with the Category Manager's review to account for any supplier changes in regards to product weight, price and cost.
- We traced weight selections from our sample of 75 items to the weights listed by the initial supplier in order to ensure the accuracy and completeness of the listing extracted from the merchandise management system.
- See observations in section 5.2.1; no discrepancies were noted.
5.2.3 Objective 3: Ensure that monthly claims and detailed reports are valid and accurate
- Claims are processed within the first 10 business days of the month and are subject to a reasonableness check by the Canadian Operations Controller prior to submission.
- Validity and accuracy of the claims are reliant on the controls in the merchandise management system and the pricing system relating to the NNC program. Weekly updates of pricing, costs, weights and eligibility are done to ensure the accuracy of the data.
- Monthly claims selected for testing were agreed to the itemized report.
- See 5.2.1 for testing of the subsidy of individual items claimed.
5.2.4 Objective 4: Demonstrate that controls in place find errors and fix them on a timely basis
- The Recipient relies on the controls built within the merchandise management system (including access controls) to determine the eligibility of communities, as well as the itemized products category and eligibility.
- As the claims process is automated, and NNC subsidy rates are fixed, any errors would pertain to the adjustment of product weights in the merchandise management system. The Recipient runs weekly reports to identify and ensure the validity of changes in the merchandise management system. Potential deficiencies in the process such as an incorrect identification of the subsidy are subject to various levels of controls and also through 3rd party verification by Crawford.
5.2.5 Objective 5: Verify that monthly food price reports are accurate (Northern retailers)
- The Recipient provides AANDC with an updated food pricing report monthly along with the claims which identifies all food prices generated per the merchandise management system and inputted into the pricing system.
- We observed that for the twelve (12) communities the food prices per the pricing system are accurate by verifying food pricing reports and also tracing back the information to in-store receipts.
- No discrepancies were noted.
5.3 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 assessment is a registered Northern Retailer.
Northern Retailers must include on-receipt messages accepted by AANDC through notices to the recipient. They must also provide in-store signage and display posters in every store benefiting from the Program in visible areas to the customers. The use of shelf hangers to identify key subsidized products in every store, in addition to the distribution of promotional and informative material provided by AANDC is expected as part of the program visibility requirements.
5.3.1 Objective 1: Recipient must include on-receipt messages (accepted by AANDC)
- The Recipient has an approved AANDC message included on the receipts of all their Northern stores in all 67 eligible communities. The standardized message summarizes the total cost of the order, and the general subsidy rate applied per kilogram purchased. As such, only a general informative message is include on the receipts.
- We obtained receipts for the 75 individual items tested and validated the inclusion of the AANDC approved messages however we noted that while the end consumer will be informed of the rate reduction received they do not see the dollar value of the subsidy.
- No discrepancies were noted.
5.3.2 Objective 2: Install posters and shelf hangers in every store benefitting from the program in areas where they are visible to customers
- We obtained in-store photographs from the 12 communities selected which showed that the Recipient has posters installed and shelf hangers in key areas identifying the subsidy rate, the savings and the end retail price for consumers.
5.3.3 Objective 3: Ensure Recipients are using the most effective and cost-effective supply chain arrangements and routes to reduce the price of foods as much as possible for consumers
- The Recipient indicated, they continuously search for the most effective and efficient supply chain arrangement in order to maximize savings. The Recipient uses its large network across the country in order to coordinate the shortest transit given the perishability of the goods, the most cost-efficient and the most accessible methods of transportation. All eligible communities and eligible products are ultimately transported via air from various hubs across the country.
- Non-subsidized products are subject to transportation through winter roads (if accessible) or by water if possible. These alternative methods are not used for subsidized products.
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 Northern Retailer, 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.
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 business and established are not receiving a subsidy
- As a for-profit company and as part of regular business operations, the Recipient makes sales to establishments in ineligible communities ("contract sales").
- We noted that contract sales to organizations are managed differently than standard orders.
- Contract sales are processed uniquely under a separate store code for specific organizations with an on-going agreement. Any purchase made from the listing of establishment agreed under contract sales will be processed under that store code and are flagged as a non-eligible community and will not be included in the claims build process.
- We obtained the list of organizations with on-going agreements for the period under assessment. We assessed all customers on the list and, based on the nature of the recipient and the community, we assessed whether any ineligible businesses and/or establishments benefited from the program. There was no indication that ineligible organizations are receiving a subsidy; however, the limited extent of our procedures made it impossible to conclude on this matter.
- Based on our assessment, the list did not include any ineligible business or establishments; however, the Recipient does not inform its clients that they cannot sell and/or ship subsidized items to restricted organizations.
Based on the procedures we performed, no significant exceptions were noted in the compliance with the program.
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.
AANDC should also note that our assessment relates to the period from April 1, 2013 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.
|Fort Good Hope||NT-SAH-FGH|
|Gods Lake Narrows||MB-NMB-GLN|
|Island Lake (Garden Hill)||MB-NMB-ILA|
|Little Grand Rapids||MB-NMB-LGR|
|Negginan (Poplar River)||MB-NMB-NEG|
|Red Sucker Lake||MB-NMB-RSL|
|St. Theresa Point||MB-NMB-STP|
Appendix B – Summary of claim submissions
|Month||Amount of Claimed Subsidy||Selected for detailed assessment|
|April 2013||$ 2,616,865||X|
|May 2013||$ 2,603,772|
|June 2013||$ 2,451,658|
|July 2013||$ 2,917,310||X|
|August 2013||$ 2,496,827|
|September 2013||$ 2,969,417|
|October 2013||$ 2,944,739||X|
|November 2013||$ 2,703,135|
|December 2013||$ 2,886,112|
|January 2014||$ 2,677,574||X|
|February 2014||$ 2,496,590|
|March 2014||$ 2,790,895|
|April 2014||$ 2,739,775|
|May 2014||$ 2,558,768||X|
|June 2014||$ 2,736,633|
|July 2014||$ 2,710,378|
|August 2014||$ 2,588,749||X|
|September 2014||$ 3,090,663|
|Total Subsidy Claims||$ 48,979,860|
Appendix C – Specified procedures report
100 Queen Street
Ottawa, Ontario K1P 5T8
To: Aboriginal Affairs and Northern Development Canada ("AANDC")
Re: True North Community Co-operative (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, 2013 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 which included:
- the Recipient's pricing practices in relation to the subsidy; and
- the Recipient's process to analyse its profit margins.
- 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 NCN Program. We verified the inclusion of pre-approved messages on receipts and the inclusion of subsidy on display for all 12 communities tested.
- Documented the Recipient's supply chain management process through enquiry of the Recipient, to understand how they ensured the effectiveness of the supply chain.
- From a sample of 6 monthly claims, we:
- Reconciled the total monthly claim to the underlying itemized food report.
- From each of the 6 monthly claims, we further:
- Sub-selected 2 eligible communities (12 communities in total) and verified the products were shipped to an eligible community (through verification of shipping documents and comparison to the NNC Program Manual); and
- recalculated the total individual claim, including the total Level 1 and Level 2 subsidies; and traced the total of the individual order to the overall monthly claim.
- From the 12 communities, we sub-selected 75 specific items, which we:
- Verified the price agreed to the order form, food price report and the cash register receipts;
- recalculated the weight of the item and compared this to the weight listing provided by the suppliers (which is used to calculate the subsidy);
- traced the weights tested to the weights listing provided by the supplier and used for the recalculation of the subsidy;
- verified the shipping rate used to calculate the customer's total purchase cost was in agreement with the freight rates negotiated between the Recipient and the airlines; and
- for sample items that were sold prior to the introduction of the program (34 items in total) we recalculated the profit the margin earned to the margin reported by the recipient prior to the introduction and obtained explanations for significant changes.
- Documented the design and implementation of controls established by management to identify and correct errors in claims submitted to AANDC.
- Documented through enquiry of management the process to identify ineligible customers. We also reviewed the orders from a sample of monthly claims in procedure 5 for any ineligible customers however, the Recipient does not inform its clients that they cannot sell and/or ship subsidized items to restricted organizations.
As a result of applying those procedures, we have not noted any significant exceptions; 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
November 17, 2015