Compliance assessment report Rampart Rentals

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

Observations:

• Goods are typically purchased from wholesale suppliers in Edmonton, such as The Grocery People, Weston, and Saputo Dairy.
• Goods are trucked from Edmonton to Yellowknife, and subsequently transported by air from Yellowknife to Norman Wells (Buffalo Airways). We understand through enquiry of the recipient that, in the past, First Air was used for some deliveries; however, Buffalo Airways offered more convenient flight times and therefore this airline was chosen to provide freight services.
• In the winter months, Norman Wells is accessible by ice roads from Yellowknife, and the Recipient may sometimes ship products by truck to Norman Wells. The goods shipped by ice roads are typically non-perishable food and household products, due to the time taken to travel on the roads (2-3 days between Edmonton and Norman Wells) and the fact that many trucks are not properly equipped to handle perishable goods.  Goods shipped by the Recipient using the ice roads are not eligible for the subsidy (however, the nature of most of the products shipped using this method would not qualify for the subsidy regardless).
• In the summer months, barges are used to transport goods on the Mackenzie River from Fort Simpson, Northwest Territories to Norman Wells.  Similar to the ice roads, the nature of goods shipped using this method are non-perishable food and household items, due to the shipping time (approximately 30 hours) and the fact that refrigerated trailers are not always available to make the shipments on the barges.
• Goods are typically delivered as follows:
  • Plane: Twice weekly (Monday and Friday), year-round.
  • Trucks: Once or twice weekly, from the end of January to the end of March, based on delivery schedule and needs.
  • Barges: Once or twice per month, from the end of June to the end of September.
• The details of all products sold by the Recipient are inputted into the Recipient's database, including the UPC code, brand, product description, size, and price.  When the goods are scanned at the cash register at the time of purchase, the cash register's point of sale system retrieves the price information from the database.  Only the store's General Manager makes changes to the underlying database.
• For products that are eligible for the NNC subsidy, the subsidized price is programmed as a "discount" within the database.
• The subsidy is subsequently passed on to the customer at the point of sale. The subsidy rate as prescribed by AANDC for Norman Wells is $2.20/kilogram for a Level 1 product, and $0.40/kilogram for a Level 2 product.
• The Recipient measures product weights in pounds for internal purposes (whereas NNC's subsidy program is based on weights measured in kilograms). Therefore, weights and subsidy amounts require conversion by the Recipient for purposes of applying the subsidy at the point of sale (as well as for the claims submission process).
• We noted that in most cases, the amount of the subsidy applied was not directly proportionate to the weight of the product (i.e. based on the item weight, the subsidy provided was either higher or lower than our expected amount based on AANDC's prescribed subsidy rate). The subsidy is typically applied based on the General Manager's past experience.
• Thirty-three (33) individual orders (from six different monthly claims) over the thirty-month period of our compliance assessment were selected for detailed testing.
  • Of the thirty-three (33) individual orders, four (4) products appeared to be bulk purchases and no subsidy was provided to the customer (see further discussion in section 5.4.1).
• Of the remaining twenty-nine (29) items, based on product weights, we expected a total subsidy provided to the customer of $46.68; however, the total subsidy (as confirmed through scanning products through the cash register as mock sales) was $41.21, a difference of $5.47. Some products were subsidized higher than expected, while others were subsidized lower than expected, based on AANDC's prescribed subsidy rates for the community.

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:

• Service delivery suppliers provide invoices upon delivery:
  • Airline companies provides the waybill upon delivery of goods;
  • Trucking companies provide listings with invoices showing the details of items shipped.
• Good suppliers' invoices will be provided at the time of delivery.
• Management will compare the weight of invoices and compare to listings received to ensure the weight of food delivered is appropriate.
• Management will also compare the weight of good suppliers' invoices to listings provided by delivery companies for appropriateness.
• Claim for weight shipped includes weight of the pallets (Buffalo weights include the pallets)
• Pricing decisions for individual products, both subsidized and unsubsidized, are made informally based on the General Manager's extensive background in the grocery industry. The General Manager assesses which eligible products to subsidize, which are primarily Level 1 goods. The store sells a number of products which are eligible for the subsidy, but not all products are claimed (nor is a subsidy provided).Given the lower subsidy level for Level 2 goods, based on the product weights, any applied subsidy would often be negligible. Therefore, the General Manager focuses on higher-weight, Level 1 products.  Additionally, for items shipped via truck or barge, no subsidy is claimed (many Level 2 products are shipped this way).
• Product prices are advertised on the store shelves, and a receipt is generated at the cash register for the customer at the time of sale.  Subsidized products are identified on the receipt with the words "sale discount" and the amount of the subsidy. The store does not use the sale discounts for any other purposes (prices generally remain stable year-round and there are no promotional offers); therefore, any products that are indicated as having the "sale discount" relate to NNC subsidized goods. This receipting practice only began in December 2014; prior to this, the underlying prices within the database were lowered to apply the subsidy (i.e. it was not clearly evident which goods were subsidized and how much of a subsidy was applied).
• Per our discussions with the General Manager, the Recipient does not analyze profit margins.
• We also noted one instance where the price of the product on the shelf did not match with the price per the point-of-sale system.  The product, a 907 g bag of carrots, had a shelf price (which should include the subsidy) of $4.49.  The product scanned in the cash register on January 30, 2015 at $5.79 with no subsidy indicated.
  • Per discussion with the General Manager, he noted that the UPC code had changed on the product and the database was not updated.  The pricing was updated in the database the same day. When the product was re-scanned after the price update, we observed that regular price was adjusted to be $6.79 (from $5.79), less a subsidy of $2.00 (reasonable, carrots are a Level 1 product and 0.907 kg x $2.20/kg = $2.00), for a newly reduced price of $4.79.
  • We noted that the regular retail price was increased by $1, prior to the application of the subsidy; however, we were unable to compare the details of the previous product (with the old UPC code) to verify if the price increase was reasonable.

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

Observations:

• See documentation in sections 5.1.1 and 5.1.2 for the process implemented by management to purchase goods and services, and the amount of subsidy passed on to the end consumer.
• Management's calculation of profit margins on products sold in the store is typically done based on the General Manager's extensive grocery experience and is not formally calculated. The General Manager benchmarks a reasonable profit for products based on the product type and past history of sales.

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 application of the subsidy (including profit margins)
• Based upon our discussions with the General Manager, the Recipient does not analyze profit margins.

Conclusion: The Recipient does not have established processes and procedures which ensure that the subsidy is consistently and accurately passed on to the end consumer. In many instances, the end customer was receiving a higher subsidy than was being claimed back from AANDC; however, in other instances, the subsidy provided was lower.  Additionally, there is no analysis of profit margins performed by the Recipient.

Recommendation: We recommend that the Recipient establish processes and procedures to ensure that the subsidy is fully passed on to the end consumer, and that the profit margin is not eroding the subsidy.

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, and Section 5.2.2 for information provided to the end consumer.
• Items eligible for the subsidy are programmed into the Recipient's point-of-sale system database as sale items – the "discounted" price shows in the database (by comparing the regular price and the discount price, the amount of the subsidy can be calculated).  The Recipient does not offer any other regular sales; therefore, when the system is queried for sale items, the items that show up are exclusively NNC subsidized products.
• The Recipient does not maintain a list of products eligible for the subsidy and required assistance from the software customer support to generate a list of all discounted items for our review. The eligible products are not reviewed regularly.

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.
• During our on-site visit (January 2015), we noted that Nutrition North Canada signs and shelf hangers are prominently displayed on eligible goods, such as fruits/vegetables, potatoes, cheese, pasta, and dairy products. All signage was clearly visible and appeared in good condition...
  • The General Manager indicated that some posters were provided to the Recipient at the inception of the program, but no further signage was subsequently received.
• We also performed a "mock" purchase of 10 eligible items during our field visit to verify the on-receipt messaging. The receipt displayed a sales discount for each eligible product; however, did not differentiate between Level 1 or Level 2 products, and did not show the subsidy rate for the community.  
• The General Manager indicated that the messaging on the receipts was only implemented in December 2014; hence the Recipient did not display the subsidy rate on cash receipts for the period assessed.

5.2.3 Objective 3: Ensure that the Recipient has established an efficient 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 Recipient has a choice in airline companies between Buffalo Airways and First Air; First Air charges $0.05/pound less than Buffalo, but Buffalo typically has more storage space in airplanes for air freight.
• Management also considered other airline companies:
  • Canadian North may provide freight services, but passenger services are deemed a priority; i.e. freight may be "bumped", and goods would therefore perish;
  • North-Wright air can only provide freight services if space is available, therefore no guarantee that goods would be shipped.
• Trucking companies are selected on a cost basis, i.e. the lowest cost provider is selected.
• Overall, trucks are used where feasible due to the lower overall cost, then barge, and finally, air travel, however weather considerations play into the choice of carrier as rolling stock is not an option year round and may impact spoilage.  Additionally, perishable goods are always shipped via air freight as the shipping time for any land-based travel is too long to maintain the quality of the products.  We noted that only products shipped via air are eligible for the NNC subsidy and we did not identify any instances where products shipped by other methods were claimed for subsidy reimbursement from AANDC.

Recommendation: We recommend that the Recipient continue its current practice of reflecting the subsidy as a discount to the end consumer to ensure that the subsidy is communicated in a transparent process to the end consumer. The Recipient should ensure that the consumer is aware that the ‘discount' relates to the NNC Program either through signage or a description on the receipt itself.

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 General Manager prepares the claim based on the information collected during the previous month.
  • The claim is prepared based on the shipping invoices received from Buffalo airways and the supplier invoices (from TGP, Saputo, etc.).
  • As the claim is being prepared, the General Manager 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).
  • The claims preparation process is manual; manual calculations are also required by the General Manager (e.g. to convert pounds into kilogram, additions on the claim amount, etc.)
• We were informed that at the start of the program claims were filed to AANDC after the established deadlines; more recently claims have generally been filed within the 15-day timeline, however some delays still exist as a result of the time taken for data entry.
• We noted that there is no independent review of the claim prior to the claim being submitted to AANDC.
• Thirty-three (33) individual orders (from six different monthly claims) over the thirty-month period of our compliance assessment were selected for detailed testing.
• For each of the thirty-three (33) orders, we verified the weight of the claimed items to the actual product weights (based on package weights from items in store), or to the underlying shipping documents.
• We noted one (1) error in the 33 individual orders tested relating to ineligible products claimed: in February 2014; an item (Iced Tea) was incorrectly labelled as a Level 1 subsidy under unsweetened drinks/juice.
• We also noted that some of the products claimed for the subsidy were not sold in store, although they did appear to be eligible products (dairy, meat, etc.). We observed that the product quantities were unusually large in comparison to normal retail sizes.  Per inquiry with the General Manager, we noted that these products were being sold to mining camps in the area.  See further discussion in section 5.4.1.
• We also randomly selected nine (9) ineligible items from the store shelves and performed a mock sale by scanning the products through the cash register system. None of the 9 items had a discount applied at the point of sale.

Recommendation: 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. This would include implementing controls to ensure claims are filed on a timely basis and that there is an independent review process occurring prior to information being submitted to AANDC, which will increase the quality of the claims being submitted.

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; we did not identify in our testing any discrepancies in the weight of items being claimed.

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

Observations:

• See sections 5.3.1 for the reporting process implemented by management.
• See results of testing at section 5.3.1 and the exception noted.

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

Observations:

• See sections 5.3.1 for the reporting process implemented by management, including deficiencies noted related to lack of independent review of claims prior to submission

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

Observations:

• The requirement for Northern Retailers to submit monthly food price reports was ultimately phased out.  The 2012-2013 Agreement between AANDC and the Recipient required monthly forecasts, submitted to AANDC on a quarterly basis. The 2013-2014 Agreement reduced the submission requirement to three times per year. This reporting requirement had been completely eliminated as part of the 2014-2015 Agreement.
• Per the Risk Assessment provided by AANDC, the Recipient submitted all required reports; however, there were often delays and reports, including the food price reports, were provided after the prescribed deadline.
• We could not obtain product price data for longer than approximately six months prior to our fieldwork date from the Recipient's database (i.e. we could not verify any pricing information prior to approximately July 2014).  No other product price information was maintained by the Recipient. As a result, we could not assess the accuracy of previously submitted food price reports as although the General Manager had noted that prices remain relatively consistent, we had no supporting documentation to verify this statement.

Recommendation: 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. This would include implementing controls to ensure claims are filed on a timely basis and that there is an independent review process occurring prior to information being submitted to AANDC, which will increase the quality of the claims being submitted.

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

Observations:

• The Recipient maintains a customer list with customer identification numbers (for processing sales on account).  To assess possible sales to ineligible customers, we reviewed the customer list and customer folders maintained by the Recipient (noting that only records were available from January 2015 onwards; our assessment was designed to assess whether there could have been potentially ineligible sales during our assessment scope based on recent sales activity). Records for previous calendar years are submitted to the Recipient's bookkeeper, and detailed transaction information is not retained (only summarized data is available). Additionally, the Recipient updates cost and price data for individual products within the point-of-sale system as needed; the system does not retain a history of past price/cost data for longer than a period of a few months.
• Each customer folder was labelled by organization/business name.  We identified any customer names that were potentially ineligible (such as construction or mining companies). We also reviewed the Norman Wells township website, which had a business directory categorized by business type.  We generated a list of businesses or organizations that would be deemed ineligible based on the criteria in the NNC Program Manual, and further investigated sales records for any identified organizations.
• We observed that for the majority of business/organization customers, purchases are made in-store and put "on account".  The related cash register receipts are maintained in the customers' folder in the General Manager's office, and invoicing is done (every 1-2 months) for any customers with unpaid balances.  The only receipts for purchases on account were from January 2015 (the month of our on-site visit) so our observations are limited to this period. We did observe that there were sales to several businesses and organizations that were identified as ineligible; however, most of the purchases were for ineligible products that did not have a subsidy applied (typically coffee or cleaning supplies).   Sales are typically smaller amounts (less than $200).
• We noted that some receipts for sales on account for ineligible customers included items that had the NNC subsidy applied. Per discussion with the General Manager, because the purchases are made in-store, it is difficult to override the subsidy within the cash register, and because there are limited instances of subsidized goods being purchased on account, this practice has not been implemented.
• We could not verify the on account sales made during the scope of our assessment to quantify the impact of these in-store sales where subsidies were applied to potentially ineligible customers. Based on our observations from the January 2015 sales records, the amount of the subsidy provided (and therefore claimed) was minimal – likely less than $50.
• Through our testing of the application of the subsidy in section 5.3.1, we noted that some items claimed in the Itemized Food Reports were unusually large quantities and we could not find these items for sale in the retail location. Per discussion with the General Manager, these items were purchased and sold to mining camps in the area.
• During our discussions with the General Manager, he noted that there are two mining camps in the area to which the store sells products.   We further requested the customer sales folders for these two customers (again, the only documents reviewed during our on-site visit were from January 2015) and noted that bulk orders are placed by the camps and the products are then ordered by the General Manager and shipped to Norman Wells.  Per the General Manager, these camps do not receive a subsidy; however, would likely pay less than the cost of the same or similar goods in the store due to the bulk ordering/quantity discount offered.
• We observed that for one of the camps, an order form exists with the frequently ordered items. The camp representative indicates the quantity of any items, as well as writes any additional items requested.   This camp orders regularly; typically weekly if not more frequently.  The other camp (which orders less frequently) will communicate their order as needed with the General Manager (the order is handwritten on paper).
• A subsidy is not directly provided to the mining camps; however, if the items are considered eligible under the NNC Program guidelines, they are often claimed for the subsidy. Therefore, the Recipient is receiving reimbursement of a subsidy that was not passed to the eligible customers.
• Per discussion with the General Manager, he indicated that one of the camps has only been making purchases since approximately August 2014 (covering the last two months of our assessment period), whereas the other camp did not start ordering until October or November 2014 (outside the scope of our assessment period). We attempted to quantify the impact of the ineligible sales; however, we were unable to review a complete population of sales documents covering the assessment period.
• The General Manager provided a summary of the amounts shipped in each order to one of the camps (the one that orders most frequently). Between July 29, 2014 and January 23, 2015, it shows that 19,562.90 pounds (approximately 8873 kg) were shipped to the camps that were also claimed for the subsidy.  We were unable to verify these calculations or the underlying support – as most goods are Level 1 products, we can approximately quantify the total impact as $19,521 in over claimed subsidies within this time frame.  The amount relating to our assessment period is 7,616.5 lbs (3,455 kg), which would approximate an over claimed subsidy amount of $7,601.  We are unable to assess whether the summary provided is complete or whether sales to ineligible customers have occurred prior to July 29, 2014.
• Upon investigation of these sales, the Store Owner requested the General Manager to cease claiming goods shipped to either of these customers for the NNC subsidy.
• We also noted that there are several other businesses owned by the same owner of Rampart Rentals, including a hotel/restaurant as well as one of the trucking companies used to ship goods via the ice roads to Norman Wells.  We inquired with the General Manager about the provision of potentially subsidized goods to these related parties. For the food shipped on the ice roads by the owner's trucking company, it was noted that these goods are not eligible for the subsidy (as they are not air-shipped) and the nature of most of the goods are non-perishable, whereby they would not qualify for the subsidy.  In our detail testing of claims, we did not identify any subsidies claimed where the products were not shipped by air.
• We also reviewed the customer folders for the identified related parties, including the hotel. There were minimal receipts available (from January 2015), none of which included sales of subsidized goods.  Typically, the organizations would order and ship goods on their own, not through the store.  As such, the only purchases on account are for one-off items where products are needed earlier than when the next shipment arrives. However, we were unable to verify sales to these parties prior to January 2015.

Recommendation: We identified sales to ineligible businesses and establishments (mainly mining camps) for which the Recipient claimed a subsidy, although minimal subsidies on the end prices were provided to these organizations (with the exception of some in-store sales which could not be quantified but did not appear significant).  We recommend that items which are then resold to ineligible customers not be claimed as part of the subsidy, and noted that upon observing this practice during our on-site fieldwork, the General Manager acknowledged that this practice would not be continued going forward.  Further, we recommend that AANDC consider recovering the overpayment of $7,601, as approximated above, relating to the ineligible subsidy claims.  Additionally, we recommend that the Recipient retain the detailed sales records for any transactions relating to the Program for the length of time specified in the Recipient's funding agreement with AANDC in order to substantiate the financial and non-financial reports and facilitate future Program audits.