Compliance Review Report - Arctic Co-operatives Ltd.

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.

Findings and recommendations were raised which summarized that the freight costs for five communities did not accurately reflect the entire subsidy since a major supply-chain adjustment in May 2013. The Recipient has informed us that a reimbursement was made to NNC. (Refer to Finding #1 and #2 in section 3.1 for additional details)

Conclusion
The review concludes that, in some instances, the Recipient is not reflecting the entire subsidy in suggested retail prices on eligible NNC products.

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 posters were visible in the store. Refer to section 3.2 Observation Note #1 for additional details.

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.

Findings and recommendations were raised relating to information discrepancies between the two reports provided to NNC and missing supporting documentation such as waybills. Refer to Finding #3 and #4 in section 3.3 for additional details.

Conclusion
The review of the reporting and claiming systems and related procedures revealed that the controls could be improved 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 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. Refer to section 3.4 Observation Note #3 for additional 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 recipients are 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 recipients' 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 recipients respect 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 Arctic Co-operatives Ltd. for the period of July 1, 2012 to July 31, 2013. The on-site review was conducted at the office of Arctic Co-operatives Ltd. in Winnipeg, Manitoba from November 15 to 21, 2013 and at the Co-op store in Rankin Inlet on November 20, 2013. The Recipient was verbally debriefed on the findings through a conference call on December 20, 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 processes;
• 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 Rankin Inlet to ensure the price list submitted to NNC reconciles with the actual items prices in store.
• 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 and the respect of program rules but has not complied entirely with the objectives relating to passing on the subsidy and claims and reporting as described in the report under Sections 3.1 and 3.3 respectively.

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 Recipient is providing the subsidy to the consumer through a reduction of the actual freight cost to the Recipient. However, in five communities, the freight cost was not reduced accurately due to a computer programming error. This resulted in a portion of the subsidy not being appropriately passed on to the consumers in these communities. Upon discussion with the Recipient they have indicated that this programming issue would be corrected and that Nutrition North Canada has been reimbursed accordingly.

Recommendation #1
We recommend that the Recipient take appropriate action to correct the programming error.

Finding #2
As mentioned above, the Recipient is providing the subsidy to the consumer through a reduction of the actual freight cost to the Recipient. The net freight cost (NFC) (actual freight cost less subsidy (Level 1 or Level 2)) per KG per community is calculated by the Merchandising and Logistics Group using an Excel spreadsheet. The spreadsheet is transferred to the Informatics Group for upload into the Purchase Order (PO) system. The PO system uses this information to calculate the freight cost charged and the suggested retail price of the item ordered.

The Merchandising and Logistics Group updates the NFC spreadsheet when there is a change in the freight rates, fuel costs, tolls, security screening fees, etc or subsidy rates.

One of the tests performed during the compliance review was to obtain from the Merchandising and Logistics Group the net freight cost (NFC) and trace these costs to the PO system to ensure the accuracy of the calculation of freight cost and suggested retail price of items.

The review revealed that:

1. Prior to May 2013, the NFC was not kept in file and therefore, we are unable to comment on the accuracy of the NFC prior to May 2013.
2. The most current NFC (October 2013) did not always reconcile with the information in the PO system. We reviewed 23 NFC and the results were as follows:
   1. Eight (8) NFC were higher in the PO system (result: suggested retail price is higher);
   2. Ten (10) NFC were lower in the PO system (result: suggested retail is price lower); and
   3. Five (5) NFC were equal in the PO system (result: suggested retail price is accurate).

Recommendation #2
We recommend that the Recipient take appropriate action to update the PO system with the most current NFC. In addition, the Recipient should ensure that the PO system always contains the most current NFC data.

Conclusion Passing on the Subsidy
The review concludes that, in some instances, the Recipient is not reflecting the entire subsidy in suggested retail prices on eligible NNC products.

3.2 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).

Observation Notes #1
We visited the Co-op store in Rankin Inlet and performed a walkthrough of the sales floor. It was noted that posters advertising the NNC program are placed strategically in the store and the subsidy rates are written on cash receipts.

Conclusion Program Visibility
The review revealed that the Recipient was identifying the subsidy rates on the cash receipts and posters were visible in the store.

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 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.

To receive a payment, the Recipient must provide NNC with two reports.

Report #1 - NNC Itemized Shipment Report: This report includes each order that is placed by the coop store through the Recipient's PO System. The information on the report will include the PO, by NNC item ID, the weight for each item, the relating invoice number and waybill number when applicable.

Report #2 – NNC Subsidy Claim Summary Form: This report includes all the merchandise that was shipped to the coop stores. The information on the report will include the invoice number, vendor name, community name, community ID, subsidy level, weight in kg, subsidy rate and total claim.

Finding #3
We performed a test where we randomly selected 60 invoices. Every items weight on the invoice was compared to the items weight on the PO. The review revealed discrepancies between the items weight on the invoice and the items weight on the PO. The result of this test indicated that the weights did not reconcile in 25 out of 60 invoices reviewed (42%) within an acceptable difference of plus or minus 5%.

Recommendation #3
The Recipient should review the weight included in the PO System to ensure they accurately reflect the Supplier's weight as per their invoice.

Observation Notes #2
We performed a test to ensure that the merchandise ordered by the coop store as reported in Report #1 reconciled with the shipping information in Report #2. The Recipient's biggest supplier (approximately 95% of all PO's are fulfilled by this supplier) informed us that the percentage of the PO's fulfilled for all the PO's submitted to the biggest supplier was at 93.1 % for produce items and 97.5% for grocery items. Therefore, we can conclude that in the aggregate, a kilogram ordered by a coop store through the Recipient's PO System as indicated in Report #1 will be between 2.5% and 6.9% higher than the actual shipments.

Finding #4
We performed a test to reconcile the weight on invoice provided by the supplier (Report #2) and the weight provided on the waybill provided by the airline. We were unable to complete this test as only 10 of the requested 60 waybills (17%) were provided. The Recipient informed us that the suppliers often do not provide the waybill with their invoice. In addition, the airlines will, in some cases, submit the waybill but, in many cases, it cannot be matched to a specific invoice.

Recommendation #4
The Recipient should ensure the supplier submits the waybill with their invoice prior to payment or dialog with AANDC Management to arrive at a practical deliverable with respect to air waybills to meet the expectations of the program.

Observation Note #3
We visited the coop store in Rankin Inlet 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. The results were that the prices on the most current NNC Food Prices Report were accurate and fairly represented the actual food prices in the Rankin Inlet store.

Conclusion Claims and Reporting
The review of the reporting and claiming systems and related procedures revealed that the controls could be improved 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 Notes #4
We visited the Coop store in Rankin Inlet 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. In addition, we reviewed the accounts receivables of the store, which revealed adherence to these rules.

Conclusion Respect of Program Rules
The review revealed that the Recipient was respecting the program rules with respect to sales to ineligible consumers.