Compliance Review Report - Kovalik Enterprises Ltd (Public Meat)

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: The Recipient has instituted procedures to ensure that a subsidy is passed on to customers through lower prices. However, we could not ascertain the accuracy of the value of the subsidy being passed to the consumer due to the lack of documentation available to support the weight of the product sold.

Conclusion: The review concludes that the Recipient is passing on a subsidy to the purchaser of eligible NNC products. However, based on the review, we could not verify the accuracy of the weight of each item being sold and therefore cannot provide any assurance on the accuracy of the Level 1 and Level 2 subsidy being passed on to the consumer. Please refer to Section 3.1 of the report for related details and the related observation and recommendation.

ii) Program Visibility

Review Objective: Verify that program visibility requirements are met (e.g. that the amount of the subsidy reduction is clearly identified on customers' invoices).

Conclusion: The review revealed that the Recipient was clearly identifying the subsidy reduction on the customers' invoices.

iii) Claims and Reporting

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

Conclusion: Except for the lack of documentation to support the weight of the produce sold used to calculate the subsidy, as described in i), the review of the reporting and claiming systems and related procedures revealed that the controls in place were adequate to ensure the accuracy of the subsidy being claimed.

iv) Respect of Program Rules

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

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

2.1 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 Kovalik Enterprises Ltd. (Public Meat) for the period July 1, 2012 to July 31, 2013. The on-site review was conducted at the offices of Public Meat in Winnipeg, Manitoba from November 12 to 13, 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;
• Sales detailed account to ensure that ineligible customers such as mining and construction companies are not receiving the subsidy;
• 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 program visibility, claims and reporting and the respect of program rules but has not complied with the objectives related to passing on the subsidy as described under Section 3.1.

3.1 Passing on the Subsidy

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

Finding: The Recipient has instituted procedures to ensure that a subsidy is passed on to customers through lower prices. However, we could not ascertain the accuracy of the value of the subsidy being passed to the consumer due to the lack of documentation available to support the weight of the product sold.

Conclusion: The review concludes that the Recipient is passing a subsidy to the purchaser of eligible NNC products, except as highlighted below in observation #1.

Observation #1: Public Meat is a southern supplier and is mainly a butcher shop that receives orders forms from northern customers by e-mail, phone or fax. Once an order is taken, it is processed using an order form (pick list). Each item is picked and weighed individually using a commercial meat weight scale. The weight of the meat is manually written on the pick list. Once the order is complete, an invoice is prepared through the accounting system. The invoice indicates the Level 1 and Level 2 subsidy rebate amounts that were allocated and reflect the rebate accordingly. Once the invoice is complete, the order forms (pick list) indicating the individual item weight is destroyed. The selling price of items is set using the following formula: cost of item + profit margin - subsidy rebate + freight.

Based on this information, the auditor was unable to ascertain himself on the accuracy of the weight of each item being sold since the support for the weight of the product, which is hand written on the pick list, is destroyed once the invoice is completed. Therefore we cannot provide assurance on the accuracy of the Level 1 and Level 2 subsidies being passed on to the consumer. However, the auditor is able to confirm that a subsidy is passed on to the consumer.

Recommendation #1: To provide for an appropriate audit trail, we recommend that the Recipient ensures the order form (pick list) showing individual item weight is attached to the corresponding invoice and is kept on file to support the calculation of the subsidy for future reference.

3.2 Program Visibility

Review Objective: Verify that program visibility requirements are met (e.g. that the amount of the subsidy reduction is clearly identified on customers' invoices).

Conclusion: The review revealed that the Recipient was clearly identifying the subsidy reduction on the costumer's invoice.

3.3 Claims and Reporting

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

Observation Note # 1: We tested the Recipient's reporting and claiming procedure by selecting a random number of transactions from the total claims produced from July 1, 2012 to July 31, 2013 using a statistical sampling approach. During the review process, we noticed minor errors (.3%) in the reported NNC item codes, but there were no errors in the subsidy level. No recommendation is required as the errors identified were immaterial.

Conclusion: Except for the lack of documentation to support the weight of the product sold used to calculate the subsidy, as described in i), the review of the reporting and claiming systems and related procedures revealed that the controls were adequate to ensure the subsidy being claimed.

3.4 Respect of Program Rules

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

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