Compliance assessment report AN Food Distributors Ltd.

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

Observations:

• The Recipient is an airline company and is only involved in the transportation of eligible products. They do not sell the actual products being shipped. As such, the subsidy is solely applied to transportation costs from Whitehorse, Yukon Territory to Old Crow, Yukon (as Old Crow is the only eligible community served by the Recipient). All goods are transported in passenger planes, i.e. no cargo planes are used.
• Customers purchase the goods from stores in Whitehorse (usually from the Real Canadian Superstore or other similar stores) and bring their orders to the Cargo Office of the Recipient. The Recipient has no discretion in the costs or selling prices of the products purchased and shipped by the customers, as the products are purchased from independent retailers.
• The Cargo Office requires the itemized store receipt with the goods. A copy of the receipt is taken, and the Cargo Agent reviews the individual items, weighs them, and indicates the weight of each eligible item on the receipt copy. The customer retains the original receipt, and the copy is included with the claim submission to AANDC.
• The weight of level 1 and level 2 items is then separately manually calculated, and the NNC subsidy receipt is written up (using the weight values and then the subsidy rates for Old Crow). A carbon copy of the subsidy receipt is provided to the customer for their reference.
• Items with no weight or that are not being shipped, will not have a corresponding weight written next to the item on the receipt.  Any ineligible items are weighed separately and not included on the customer's NNC receipt, but are included on the waybill to incorporate into the total shipping cost.
• A flat rate per kilogram is used for all shipments from Whitehorse to Old Crow, from which the subsidy is deducted. This rate is published on the Recipient's website.
• The subsidy calculation is performed by the agent at the Cargo Office, at the same time the waybill is created. The customer receives a receipt that shows the calculation of the subsidy (total level 1 weight, total level 2 weight, multiplied by the subsidy rates, and the total subsidy is directly deducted from the total shipping costs). We were informed that the Cargo Agent receives training on the application of the NNC subsidy, including the identification of eligible and ineligible items.
• After the customer's payment is received, the documents are provided to the accounting department who review the calculations for accuracy. The accounting department reviews the calculations by the Cargo Agents for mathematical accuracy, as well as for eligibility of items claimed, prior to entering the claim for submission to AANDC.
• The subsidy receipts manually generated by the Cargo Agents often contain clerical errors due to a number of factors – transposition errors in manually recording item weights on receipts, incorrect application of subsidy or shipping rates, or improper identification of eligible or ineligible goods. These errors can be to the advantage or disadvantage to the customer; however, most errors we noted resulted in the customer being given a higher subsidy rate than the Recipient was able to claim back from AANDC.  See further details of errors in section 5.3.

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:

• See section 5.1.1 for pricing and invoicing practices, including subsidized and unsubsidized products.

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 the Recipient is not responsible for purchasing/pricing the goods, the Recipient does not calculate profit margins on the actual products being shipped (these are purchased from independent retailers); the subsidy is applied solely against the shipping charges.
• The base tariff rate for shipments from Whitehorse to Old Crow is $3.53/kg (plus a fuel surcharge as described below); this base rate is published on the Recipient's website and updated as required (for the scope of the period of our assessment, the shipping rate was consistent).
• The fuel surcharge is assessed monthly and recalculated by the Recipient's management, and adjusted for any fluctuations in fuel prices. The fuel surcharge is an additional percentage of the total weight shipped, and is applied to all shipments made by the Recipient, we did not observe any distinction in the fuel surcharge applied to eligible and ineligible shipments (we identified this cost as part of our testing in section 5.3).

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:

• See process at Sections 5.1.1 and 5.1.2 related to the profit margin process.
• See process at Section 5.3 for the Recipient's analysis and reporting process.
• The subsidy is fully applied against the freight charges; as such, the subsidy is not eroded.

Conclusion: Our testing supported the design of processes and procedures which allow the subsidy to be passed on to the end consumer; however, we noted a number of errors in the claimed subsidy amounts; see section 5.3 for findings and recommendations.

5.2.1 Objective 1: Ensure that the Recipient has established a process to identify the amount of price reduction associated with the subsidy

Observations:

• See section 5.1.1 for the process related to the price subsidy.
• The Recipient's Cargo Agent makes the decisions on the subsidy level to be used.
• The subsidy level is indicated as "1" for products eligible for the level 1 (higher) subsidy, "2" for products eligible for the level 2 (lower) subsidy.
• The total level 1 weights and total level 2 weights are manually added up from the receipt, onto a specific "Nutrition North" receipt that shows the total weight per level 1 and level 2 separately, as well as the subsidy rate used, and the total subsidy applied.
• The NNC receipt is attached to the waybill receipt (that shows the pre-subsidized cost of freight). The NNC receipt also cross-references the waybill.
• Several errors were noted in the claimed subsidy amounts; see section 5.3.

5.2.2 Objective 2: Ensure that subsidy rates are included on cash receipts and proper in-store signage is displayed

Observations:

• See comments at section 5.2.1.
• At the inception of the program, some pamphlets were received from AANDC about the Nutrition North program. These pamphlets were put out at the Cargo Office, as well as some were provided to the Vuntut Gwitchen First Nation Band Office (located in Old Crow). No other publicity and/or signage was subsequently received from AANDC.
• As the Recipient is only involved in the transportation of goods, and does not operate a retail location, posters and shelf hangers are not required. The Recipient internally developed posters  for the Cargo Office area to advertise the Recipient's participation in the program.  The Recipient has also published information relating to their participation in the NNC program on their company website.

5.2.3 Objective 3: Ensure that the Recipient has established an effective and cost-effective supply chain management

Observations:

• See sections 5.1.1 and 5.1.2 for the process established by the Recipient related to its supply chain management process.
• The only process that the Recipient is involved in is the shipping of goods to Old Crow, Yukon Territory. Most purchases are made at the Real Canadian Superstore in Whitehorse, which is not an eligible northern retailer or southern supplier (as such, it is unlikely that goods are being doubly subsidized).
• The customer is responsible for purchasing their own food/products and getting the goods to the Cargo Office (and picking them up in the community). 

The Recipient has limited options for transporting products to Old Crow, based on the types of planes operated and the location of the community.  All goods are shipped on passenger flights (no specific cargo flights).  While larger and more modern airplanes within the Recipient's fleet may be more cost effective, the volume of flights into the community, passengers and customers does not justify the use of these types of planes.  Conclusion: Based upon the sample of items we tested, we observed that the invoicing practices of the Recipient are transparent, whereby the subsidy and freight rates are clearly identified in multiple documents from the point of order initiation through to the final payment/order fulfillment. The Recipient's calculation of the subsidy is directly provided to the end customer for their information and verification, if necessary.  The Recipient has also provided any communication material received from AANDC to potential customers.

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

Observations:

• See sections 5.1.1 and 5.1.2 for the process related to eligible and non-eligible items.
• Claims are submitted on a monthly basis by the Recipient.
• The Recipient's accounting staff receives the documentation from the Cargo office and reviews the calculation of the subsidy, and inputs this into the NNC form.
• As the claim is being prepared, the accounting personnel can identify any ineligible items (where a subsidy may have been provided to the customer, but cannot be claimed by AANDC and then this item will not be claimed).We noted that there is no independent review of the overall claim prior to the claim being submitted to AANDC.
• Twenty-seven (27) individual orders (from six different monthly claims) over the thirty-month period of our compliance assessment were selected for detailed testing.
• We noted errors in all monthly claims tested. The sum of errors identified within the claims that were tested in detail represents an over claimed amount of $232.21 (an error rate of 6%).  Some of the errors identified through our testing may have also been identified by Crawford and adjusted at the time the original claim was made; as a result, this amount does not represent the actual overclaim paid to the Recipient by AANDC.
• The nature of the errors identified through our testing was as follows:
  • Goods were claimed at the wrong weight, and/or were incorrectly entered by the Recipient.  We noted several transcription errors between the weights per the supporting receipts and the itemized food reports used to generate the claim – some resulting in over claimed amounts and others resulting in under claimed amounts. To verify the "correct" weight that should have been claimed, we recalculated the expected weight based on the item and quantity purchased (and the reference weights for fruits/vegetables as outlined in Table 3 of the Nutrition North Canada – National Manual for Program Recipients).  See details in Appendix B.
  • No receipt was available for some goods purchased and claimed.  As there were no documents to support the items claimed, we have included the amounts in the summary of errors in Appendix B.
  • Goods were claimed under the incorrect category. In most cases, the error in classification related to goods within the same "level" and as a result there was no financial impact on the claim submitted. Where a level 1 product was incorrectly classified as a level 2 product (or vice versa) for purposes of the claim submitted, the difference was noted in the summary of errors in Appendix B.
  • A subsidy was provided and claimed on products that do not meet the eligibility criteria as defined in the NNC Program Manual. See details in Appendix B.
  • The wrong subsidy rate was applied by the Recipient in the calculation of the customer's subsidized total.  Within the twenty-seven (27) orders tested, we identified two (2) instances where the customer's subsidy was incorrectly calculated – one instance used a level 1 rate of $3.53/kg and one instance used a level 1 rate of $2.63/kg.  In the first case, the customer received an additional benefit but the Recipient only claimed back the amount at a rate of $2.70/kg (therefore, no impact on the claim). In the second case, the end customer received a slightly lower subsidy but the Recipient claimed the full amount – this was included in our summary of errors in Appendix B.
• We observed several instances of other errors which did not impact the accuracy of the NNC claim, and as such, have not been included in our summary of errors in Appendix B. The nature of these errors observed were:
  • Incorrect shipping rates were used. Errors were noted where the end customer was charged both higher and lower amounts than the $3.53/kg rate prescribed. This did not impact the accuracy of the claim to NNC.
  • An incorrect weight was charged to the customer by the Recipient (which did not impact the total subsidy claimed; however, resulted in customers being over or under charged).
• Although we observed a number of clerical errors in relation to the claims submitted by the Recipient (resulting in a net overclaimed amount for the specific claims tested), we also observed that for all months within the period of our assessment (with the exception of December 2012), a higher subsidy was granted to the end customer than was claimed back from AANDC.  Some of the goods subsidized to the customer relate to ineligible goods for which the Recipient was not entitled to a subsidy; however, we also noted that there were instances of eligible goods shipped that were not claimed.  We prepared the following summary to compare subsidies provided to the customer by the Recipient, versus the amount of the subsidy claimed from AANDC:

• As the payment is collected from the end customer at the time the original subsidy is calculated, if a claim is adjusted to remove a subsidy that was incorrectly provided on ineligible products or provided at a higher subsidy rate than prescribed by AANDC, the Recipient absorbs this cost.

We recommend that the Recipient improve its controls over the application of the subsidy in order to ensure the accuracy and validity of claimed subsidies.

We also recommend that the Recipient ensure that an independent review process occurs prior to information being submitted to AANDC, which will increase the quality of the information being provided to AANDC.

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

Observations:

• See sections 5.1.1 and 5.1.2 for the process related to ensuring the appropriate weight of items being claimed.
• See results of testing at section 5.3.1 and the exceptions noted.

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

Observations:

• See sections 5.1.1 and 5.1.2 for the process related the reporting process implemented by management.
• We noted one instance where the total weight used in the claim submission form did not agree to the total weight of items in the Itemized Food Report (a discrepancy of 133.5 kg, relating to level 1 products). The financial impact of this error resulted in an overclaimed amount of $360.45 being paid to the Recipient by AANDC on the December 2012 claim (which was not included in the summary of errors noted above). This error was not identified by the claims processor.

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

Observations:

• See sections 5.1.1 and 5.1.2 for the process related the reporting process implemented by management, including deficiencies noted related to segregation of duties.
• Notwithstanding the controls that management has implemented, we noted numerous errors in the Recipient's claimed subsidy amount.

5.3.5 Objective 5: Verify that monthly food price reports are accurate (Northern retailers)

Observations:

• Not applicable; Recipient is not a Northern retailer.

5.4.1 Objective 1: Ensure that ineligible businesses and establishments do not receive a subsidy

Observations:

• On the Recipient's website, they specifically list the ineligible customers to whom a subsidy will not be granted. The Recipient stated that they do not ship goods eligible for the subsidy to corporate customers, only individuals.
• The Recipient also stated that they assess the frequency and size of the shipments and can perform a reasonability assessment on the orders to see if the shipments are for the benefit of companies/organizations.
• The Recipient did not provide a subsidy to ineligible businesses and establishments in the sample of claims we tested.
• We also assessed the sample of claims tested to identify whether any customers to whom a subsidy was provided were potentially related parties; we did not identify such parties.