Compliance Review Report - La Fédération des coopératives Du Nouveau-Québec

i) Passing on the Subsidy

Review Objective: Verify that the recipient is passing on the value of the subsidy to consumers, i.e. that selling prices are reduced by the amount of the subsidy.

Finding
A finding and recommendation were raised. We could not obtain supporting documentation demonstrating the methodology used that would confirm that the subsidy is accurately passed on to the consumers. Refer to Section 3.1 for details on the findings and recommendations.

Conclusion
Based on our review, we were unable to ascertain ourselves on whether the full value of the subsidy (level 1 and level 2) was accurately passed on to the consumer.

ii) Program Visibility

Review Objective: Verify that program visibility requirements are met (i.e. the subsidy rates are written on cash receipts and program materials, such as posters, are clearly visible in the store).

Conclusion
The review revealed that the recipient was identifying the subsidy rates on the cash receipts and program advertisement was visible in the store. Refer to Section 3.2 Observation Note #1 for details.

iii) Claims and Reporting

Review Objective: Test the recipients' reporting and claiming systems and procedures with regards to gap and control issues, i.e. verify that the process used by recipients to prepare detailed reports and calculate the amount of subsidy to be claimed is sound and precise, and that mechanisms to detect and correct errors are in place.

Finding
A Finding and recommendation were raised. During the store visit in Kuujjuarapik, price differences were noted between the shelf price items and the price list reported to NNC. Refer to Section 3.3 for details on the finding and recommendation.

Conclusion
With the exception noted above, the review of the reporting and claiming systems and related procedures revealed that the controls were adequate to ensure the subsidy being claimed is precise and that mechanisms to detect and correct errors were in place.

iv) Respect of Program Rules

Review Objective: Verify that recipients respect all program rules, especially in regards to sales to ineligible consumers such as mining camps or construction companies.

Conclusion
The review revealed that the recipient was respecting the program rules with respect to sales to ineligible consumers. Refer to Section 3.4 Observation Note #4 for details.

2.1 Background

On April 1, 2011, Nutrition North Canada (NNC) replaced the Food Mail Program, which was operated by Canada Post since the late 60's. Much like Food Mail, the purpose of NNC is to make nutritious food more accessible and more affordable to residents of isolated northern communities that lack year-round surface and marine transportation links to southern centres.

There are currently 103 communities eligible for the program (84 are eligible for a full subsidy and 19 for a partial subsidy), located in Nunavut, the Northwest Territories, Yukon, Labrador, Quebec, Ontario, Manitoba and Saskatchewan. Two levels of subsidy rates per kilogram have been established for each community; Level 1 (higher) for the most nutritious perishable foods and Level 2 (lower) for other eligible items. Communities where operating and transportation costs are higher (e.g. Grise Fiord, Nunavut) tend to have higher subsidy rates.

Northern retailers and southern suppliers registered with the program (the recipients) are responsible to manage their supply chain and claim a subsidy from NNC for eligible food that they air ship to eligible communities. On a monthly basis, they must submit a claim form (kg x subsidy rates), a detailed shipment report (kg per item, community, client type, etc.), invoices and waybills to receive the payment (most 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 contribution agreements between the recipients and AANDC.

As of June 28, 2013, seven northern retailers, 28 southern suppliers and three country food processors were registered with NNC. Northern retailers are those entities that operate one or multiple food retail stores in eligible communities. Southern suppliers are food providers operating out of non-NNC communities that supply eligible items directly to small northern retailers, commercial establishments (restaurants, etc.), social institutions (daycares, etc.) and individuals (referred to as direct or personal orders) located in eligible communities. Country food processors are plants located in Cambridge Bay, Rankin Inlet and Pangnirtung in Nunavut that transform fish and meat for distribution to eligible communities within the region.

The selection of recipients for this compliance review was based on perceived risk and geographical location. Risk levels for compliance review purposes were based on the current experience with recipients regarding the claiming and reporting process, i.e. difficulties encountered by the claims processor, on information brought to the program's attention by interested parties, and on materiality. For practicality and cost-effectiveness reasons, at least two recipients have been selected per geographical location.

2.2 Objectives

The objective of recipient compliance reviews is to provide assurance that NNC recipients are in compliance with the terms and conditions of their respective funding agreements signed with AANDC. Specifically, the compliance reviews will:

1. Verify that the Recipient is passing on the value of the subsidy to consumers, i.e. that selling prices are reduced by the amount of the subsidy;
2. Verify that program visibility requirements are met (e.g. for northern retailers, that subsidy rates are written on cash receipts and program material, such as posters, are clearly visible in the store, and, for southern suppliers, that the amount of the subsidy reduction is clearly identified on clients' invoices);
3. Test the Recipient's reporting and claiming systems and procedures with regards to gap and control issues, i.e. verify that the process used by the recipient to prepare detailed reports and calculate the amount of subsidy to be claimed is sound and precise, and that mechanisms to find errors and fix them are in place; and
4. Verify that the Recipient respects all program rules, especially with respect to sales to ineligible clients such as mining camps or construction companies.

2.3 Scope

The scope included the funding provided by AANDC to La Fédération des coopératives du Nouveau-Québec (FCNQ) for the period July 1, 2012 to July 31, 2013. The on-site review was conducted at the offices of FCNQ in Baie d'Urfé, Québec from December 16 to 18, 2013 and at the Co-op store in Kuujjuarapik on November 28, 2013. The Recipient was verbally debriefed on the findings on December 18, 2013.

2.4 Approach and Methodology

The compliance review included the examination of the following:

• The pricing/invoicing practices in relation to the subsidy, e.g. profit margins on subsidized products vs. unsubsidized products;
• The weighing and shipping process;
• Define how they ensure that ineligible customers such as mining and construction companies are not receiving the subsidy;
• Onsite visit at the Co-op store in Kuujjuarapik to ensure the price list submitted to NNC reconciles with the in store price.
• The sale and/or purchasing records and supporting documentation to verify compliance with program rules;
• The reporting and claiming systems and procedures, to determine how the recipient:
  • ensures that only eligible items are claimed for and reported;
  • calculates the appropriate weight of items being claimed;
  • makes monthly claims and detailed reports that are valid and accurate; and
  • ensures controls are in place to find errors and fix them on a timely basis.

Furthermore, the review included the conduct of interviews with the recipient. The sampling approach and appropriate coverage were determined during the planning phase of the review.

2.5 Conclusion

The Recipient has complied with the objectives of claims and reporting, program visibility and the respect of program rules but we could not assess if the Recipient complied with the objective of passing on the subsidy as described under Section 3.1 of the report.

3.1 Passing on the Subsidy

Review Objective: Verify that the Recipient is passing on the value of the subsidy to consumers, i.e. that selling prices are reduced by the amount of the subsidy.

Finding #1
The FCNQ is a northern supplier who receives orders from its fourteen members (Coops) located across the Nunavik region electronically via their integrated order system. FCNQ will place the orders for all Coops and will pay for purchases made. FCNQ will also pay for all shipping made to the various Coops locations once the merchandise is received and will claim the subsidy based on eligible items shipped. The Recipient will invoice members by applying a percentage on the cost of merchandise bought to cover the transportation cost (transportation mark up). The Recipient explained that the transportation mark up is based on an average of the percentage of the net transportation costs (transportation cost less subsidy received) by product type over a certain period of time for all members. The intent was to have similar prices for all members of the FCNQ . This will result in having closer communities paying more for food transportation and further communities paying less. The Recipient also establishes the price list for all fourteen Coops members of the Federation. The prices are established by adding a percentage to cover transportation as previously explained and a percentage for gross margin.

It should be noted that this process was verbally explained and we were not provided supporting documentation to assess the accuracy of the system described above.

Recommendation #1
We recommend that the Recipient provides the detail calculation and a clear audit trail demonstrating how the full value of the subsidy is passed to the consumers.

Conclusion
Based on this review, we were unable to ascertain ourselves on whether the full value of the subsidy (level 1 and level 2) was accurately passed on to the consumer.

3.2 Program Visibility

Observation Note #1
We visited the Coop store in Kuujjuarapik and performed a walkthrough of the sales floor. During our visit, it was noted that the advertising of the NNC program was done through a large television screen at the entrance of the store. We also noted that the subsidy rates are written on cash receipts. However, we observed that there were no NCC price tag signs on the shelf that indicated the impact of the NNC subsidy on the shelf price item. The store manager informed us that the shelf tags provided were constantly falling off the shelves.

Conclusion
The review revealed that the recipient was identifying the subsidy rates on the cash receipts and program advertisement was visible in the store.

3.3 Claims and Reporting

Review Objective: Test the recipients' reporting and claiming systems and procedures with regards to gap and control issues, i.e. verify that the process used by recipients to prepare detailed reports and calculate the amount of subsidy to be claimed is sound and precise, and that mechanisms to detect and correct errors are in place.

Observation Note #2
We performed a test to reconcile the weight on invoice supplied by the supplier and the weight provided on the waybill provided by the airline. We were unable to complete this test as the invoices also include non subsidized items with no weight indicated. Additionally, the waybills can include several invoices as well as non subsidized items.

Observation Note #3
We performed a test to ensure that the weights of items indicated on the invoice reconcile to the shipment report submitted to NNC. We noted a few discrepancies between the two documents in 27 cases out of 336 (.08%). The explanation given is that when the product information is updated, the information on existing invoices is also modified as well. This can result in having discrepancies between product weights on invoices and NNC claim reports submitted. It should be noted that in the most of the majority of the cases, it was not at the advantage of the Recipient. Because of the low frequency of discrepancies and the minimum impact on NNC contribution, no recommendation was made.

Finding #2
We visited the Coop store in Kuujjuarapik and performed a test to ensure the prices on the NNC Food Prices Report reflected the actual prices in the store. We selected a representative sample of food items on the most current NNC Food Prices Report and we retraced the food items to the Store floor and compared the prices indicated on the list. In addition, we also selected a sample of food items from the Store floor and compared the prices to the NNC Food Prices Report. During the store visit, price differences were noted. We were told that these price differences can be the result in price changes or inaccurate information.

Recommendation #2
We recommend that the prices reported on the price list be reviewed to ensure accuracy of the reported information.

Conclusion
With the exception noted above, the review of the reporting and claiming systems and related procedures revealed that the controls were adequate to ensure the subsidy being claimed is precise and that mechanisms to detect and correct errors were in place.

3.4 Respect of Program Rules

Review Objective: Verify that recipients respect all program rules, especially in regards to sales to ineligible consumers such as mining camps or construction companies.

Observation Note #4
We visited the Coop store in Kuujjuarapik and interviewed the store manager who indicated that they knew the program rules with regards to ineligible consumers such as mining camps or construction companies. Additionally, all customers are walk-ins and they do not have company accounts.

Conclusion
The review revealed that the recipient was respecting the program rules with respect to sales to ineligible consumers.

Recipient's Comments:

The draft report seems clear, and as you indicated, the problems are mostly typing errors. We have (since meeting with you) improved our method of calculating and inputting figures to provide additional opportunities for verification.

Response from Samson & Associates:

No response required.