Compliance assessment report Fédération des coopératives du Nouveau-Québec

5.1.1 Objective 1: Description of process and methodology used to determine that subsidy is passed to consumers

Observations:

• As a cooperative, the Recipient does not expect to generate profits overall.  In setting the price to be charged to the village cooperatives management sets the margin for each category of products to be sold by the main cooperative in order to break even across all categories of items. The margins are approved by the Board of Directors. Margins maybe reviewed when there is a request by members to lower the cost of specific items (such as baby formulas).
• This process is the same for subsidized and unsubsidized products but the margins for subsidized products will take into account the subsidy and will be lower than for unsubsidized products.
• The margin of items sold is the estimated percentage required to cover expenses such as rent, electricity, wages, etc., incurred by the village cooperatives. Since the price charged to the village cooperatives has been reduced to reflect the subsidy, the margin on subsidized and unsubsidized products will be the same.
• Member cooperatives are considered related parties, as the Recipient's Board of Directors is composed of two representatives of each cooperative, and the selling prices in the northern cooperatives are determined by the Recipient.
• Internal financial statements are regularly reviewed to confirm that the differences between the sales amount and the cost of sales amount are not too significant in order to create excessive revenues or a loss.

Any annual surplus is redistributed to the 14 member cooperatives as approved by the Board of Directors. For the years ended December 31, 2013 and 2012, the surplus was 1.5% and 3% of total revenue, respectively.

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

Observations:

• As indicated in Section 5.1.1., the pricing process is the same for subsidized and unsubsidized products but the margins for subsidized products will take into account the subsidy and will be lower than for unsubsidized products.
• The recipient does sell to Construction FCNQ, a related party.  Based on our review of the process by which management sets pricing we noted that Construction FCNQ is charged directly for the shipping costs of goods sold, and no subsidy is claimed by the Recipient for those items.  However no administration fee is charged to cover overhead costs (these costs would represent less than 2% of the cost of the item sold).  This is effectively allocating all the overhead costs incurred by the FCNQ to the village cooperatives.

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

Observations:

• As previously indicated, as a cooperative, the Recipient does not intend to make a profit on the sale of subsidized or unsubsidized items. See section 5.1.1 for a discussion of how the margin is determined.
• The selling price is set as the product cost plus the authorized margin which is intended to cover the shipping and overhead costs less the subsidy received.  As noted, the margins are set by the Board for product categories overall. Subsidized products will necessarily have lower margins than unsubsidized product on the basis of the products costs. See illustrative example below:

• The Recipient did not make any purchases from related parties of which we were made or became aware.
• We selected a sample of 37 items and  tested each item to support management's assertion that the subsidy is fully passed on to the end consumer, our tests included:
  • Comparing the Recipient's selling price to the expected selling price (cost + authorized product margin) and obtaining explanations for differences;
  • Comparing the Recipient's selling price to the expected selling price based on their overall margin before the subsidy less the subsidy (cost + overall margin – subsidy) and obtaining explanations for significant differences; 
  • Comparing the profit margin implicit in the co-operative's selling price to their authorized margin and obtaining explanations for differences.
• For one of the 37 tests performed, we did not obtain an explanation for the margin difference between the Recipient's standard authorized margin and the actual margin; it was not possible to obtain the actual weight of this particular item (weight of cabbages vary for each item) since the Recipient's systems only retained shipment details for a one-year period.
• In addition, two of the 37 items selected for testing (bananas and jalapenos peppers) were sold to the end customer under an "uncoded" code; as these items did not have a bar code, the Recipient's employees must enter the information manually. As such, there is an increased risk of miscoding a product against the NNC Program subsidy.  Based on enquiry with management, coding errors noted at the cooperatives stores are due to the high employee rotation; coding errors increase the risk of incorrectly applying a subsidy rate. We understand, through discussion, that the Recipient is implementing solutions (e.g. reviewing their business processes for creation of new items) in order to minimize those errors. The Recipient also noted that when a Nutrition North Canada code was changed for a particular item, the Recipient did not receive sufficient notice in order to implement changes to its systems; this creates coding differences for specific items.
• Based on our procedures and for the sample chosen, and except for the one deviation noted above, no errors were noted in calculating the subsidy.

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

Observations:

• As previously mentioned in objective 5.1.3, the Recipient does not intend to make a profit on the sale of subsidized or unsubsidized items. Margins on items are approved by the Board of Directors, established based on actual costs and reviewed periodically by the Board of Directors. Any excess of revenue over expenses at year-end would be redistributed to the communities.
• See results of audit procedures on margins in section 5.1.3.

5.2.1 Objective 1: Certify that only eligible items are claimed for and reported

Observations:

• Recipient management has implemented the following processes to ensure the validity, accuracy and completeness of the monthly reports:
  • The Ordering Management Support clerks (OMS) enter every new inventory item (both subsidized and non-subsidized) in the DMS system (Data Management Software), which includes the category, a description of the item, the estimated weight and the NNC code (if applicable);
  • At the end of each day, the Assistant Manager - Store Services validates these entries by exporting a report of every subsidized item created and confirms the NNC code and the estimated weight. Adjustments are made for any discrepancy noted;
  • He also exports a report of all the items created without a NNC code in order to identify items that are eligible for a subsidy but not coded as eligible;
  • Any adjustments needed are performed by the Assistant Manager - Store Services;
  • The information is automatically transferred in the WMS system (Warehouse Management Software) as the two systems (WMS and DMS) are linked. The new items are identified as new and must be validated by a warehouse employee before any items can be received in the Recipient's warehouse;
  • When a new item is received for the first time, the clerk at the warehouse must validate the item before scanning it; such items are therefore set aside for validation;
  • The clerk measures and weighs the item separately and within its packaging (e.g. box of 12 peanut bags) and enters the data in the WMS system. We observed FCNQ entering the description of the item into the system along with the scanning. When this is performed, the items shows as "V" for validated and can therefore be scanned and processed.
• Since the items are identified as eligible or ineligible in the DMS system (items with a NNC code are eligible), the system can automatically generate a report of all the subsidized items sold to the cooperatives for a specific period.
  • The Accounting Clerk-Invoicing is responsible of generating the monthly report which is subsequently exported into an Excel spreadsheet;
  • The report is tested for mathematical accuracy and the totals are entered manually into the Monthly Subsidy Claim report; the Assistant Manager - Store services imports the sub-totals into a spreadsheet to compare on a monthly basis the subsidy claimed in order to identify significant variances which could indicate mathematical errors in the report;
  • The report, along with the detailed spreadsheet, is sent to AANDC and the Assistant Manager - Store services.
• For the thirteen-month period under assessment, we selected three (3) reports for a detailed analysis and performed the following procedures:
  • Reconciled the claim to the detailed report
  • Recalculated the detailed report
  • Reviewed the listing of items claimed in the detailed report for ineligible items
• From these three (3) reports we selected a sample of 37 subsidized purchases and performed the following procedures:
  • Ensured that the item is eligible for subsidy
  • Examined shipping documents to confirm receipt of goods and weight
  • Ensured the subsidy claimed was calculated in accordance with the agreement
• Based on these procedures:
  • The reports reconciled with the information sent to AANDC.
  • We did not identify any ineligible items.
  • For one of the 37 tests performed it was not possible to obtain the actual weight of this particular item since the Recipient's systems only retained shipment details for a one-year period.
  • We did, however, note a difference between the Excel report extracted from the DMS system (for October 2012) and the information on the report sent to AANDC. A difference of $600 (the Recipient under-claimed amount of approximately $600) arose due to an error in the manual recalculation of amounts owed by AANDC.

Recommendation: As there could be other unidentified differences between the amounts reported to AANDC the amount to which the Recipient is eligible for a subsidy, we recommend that the Recipient's the Assistant Manager - Store Services perform an independent review of reports prior to submission to AANDC to ensure the accuracy and completeness of such reports.

5.2.2 Objective 2: Calculate the appropriate weight of items being claimed

Observations:

• See observations in section 5.2.1;

5.2.3 Objective 3: Ensure that monthly claims and detailed reports are valid and accurate

Observations:

• See observations and recommendations in section 5.2.1.

5.2.4 Objective 4: Demonstrate that controls in place find errors and fix them on a timely basis

Observations:

• See observations and recommendations in section 5.2.1.