Compliance assessment report North West Company

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

Observations:

• The Recipient determined the best method to apply the subsidy and ensure it is being passed on to the consumer was to apply it directly to the freight costs. 
• All retail prices are determined by applying a mark-up to the cost of the item and then adding the freight costs net of the subsidy.  The mark-up is determined by the Category Manager and is subject to fluctuation based on a number of internal and external factors such as market conditions, changes in operating  costs (wages, utilities and other expenses) and so forth

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:

• The Recipient's pricing/invoicing practices are all automated and are customized to the criteria set by the Nutrition North Program Manual.  Retailers have access to a merchandise management system and the ordering/invoicing is automated. A purchase order is created through the system and will either be directly sent to suppliers based on products ordered, or will go through internal warehousing. All purchase orders are matched to invoices to validate the accuracy and completeness of the order as part of the reasonableness check in building the claims.
• Pricing is determined by the Item Maintenance & Pricing group.  Prices are subject to change based on the supplier costs; the Pricing Manager will make the necessary changes within the Company's merchandise management system and pricing system; similarly, changes to freight rates are monitored by the Transportation department, who update freight rates and provide the information to the Pricing group to update the pricing system and the merchandise management system.
• Database management (which includes changes to the database's information) is done regularly. The Recipient also provides a monthly food pricing report prior to submission to AANDC.
• The pricing/invoicing in relation to the subsidy is contingent on the constant updates from the Item Maintenance group, which is ultimately responsible for the modifications in product coding, categories, pricing, weights, shipping and so forth, to ensure that the subsidy will ultimately be applied if it is eligible.
• A sample of 75 items was tested to gain comfort over the invoicing and pricing practices that are currently in place, in relation to the subsidy see 5.2.1.

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:

• The Recipient determined that the best method to apply the subsidy and ensure it is being passed on to the consumer was to apply it directly to the freight costs.  
• All retail prices are determined by applying a mark-up to the cost of the item and then adding the freight costs net of the subsidy.  The mark-up is determined by the Category Manager and is subject to fluctuation based on a number of internal and external factors such as market conditions, changes in operating costs and so forth.
• The retail method calculation by the Recipient is described below through a simple example. 

Example A:

• As the example illustrates, margins remained the same in both circumstances.  The subsidy is deducted after calculating the markup on the product and supports the contribution agreement requirement which states "selling prices are reduced by the amount of the subsidy".  Example A illustrates the Retail price on Product Z is reduced from $4.50 to $3.50 demonstrating the subsidy has been fully passed on.
• One approach to determining whether the subsidy was passed along to consumers is to evaluate the pricing of goods sold with a subsidy to pricing of goods sold without a subsidy in the same community. We were unable to make this comparison as the scope of our review did not allow us to compare pre-program prices or, as we were advised, such transactions did not exist. Consequently, our procedures compared the sales prices on subsidized items at the point of sale to the sales prices in the merchandise management system. This comparison has an inherent limitation as the pricing in a particular community is subject to change from the merchandise management system due to local market conditions and other factors and may not be equivalent to what a particular item would be sold for on an unsubsidized basis in that community. We noted that, for the most part, pricing and margins on product decreased from the merchandise management system pricing to the community pricing.  NWC management confirms that the methodology used to determine retail prices ensures the subsidy has been fully passed on.  We agree that management's approach to pricing would ensure that all of the subsidy is passed along to the recipient and we can confirm that the subsidy has been deducted from the retail price. Unfortunately, we cannot compare the margins on subsidized product to unsubsidized product as there were no instances of unsubsidized product being sold in eligible communities and the scope of our audit did not include pre-program transactions that would have allowed us to consider pre-program pricing.

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 noted in section 5.1.3, the Recipient's pricing methodology deducts the subsidy in full in the calculation of the retail price. To ensure the subsidy is not eroded, the Recipient now prepares a margin analysis to assess the decrease in the margin since the introduction of the Nutrition North Program.  These analyses are performed on a quarterly basis and will take into account any business operation changes and pricing changes for NNC eligible products.
• The margin analysis provided by the Recipient was completed in December 2014 which was beyond the timeframe under audit.
• The Recipient calculated an overall margin based on identical products sold pre-NNC and still currently sold.  When comparing the March 2011 margins (i.e. prior to the implementation of the NNC Program) to the most recent analysis as at December 2014, the overall margin decreased. The analysis compared identical product margins over the last four quarter sales. Therefore, North West Company concluded that the subsidy is not eroded and is being passed on to the end consumer.  We did not audit or perform procedures on these analyses as they were outside the time period for which we were engaged to perform audit procedures.
• As part of our 75 item test, for any items that were sold prior to the introduction of the subsidy (34 items) we recalculated the Recipient's margin on these sales and compared the margin to the March 2011 margin reported in the margin analysis (unaudited) to assess whether a change in margin was eroding the subsidy.
• We would expect the margins earned prior to the introduction of the NNC Program and the margins earned after introduction not to have changed, except for changes in costs and other external market related factors. We noted the decrease in margin in individual products tested which is a strong indicator that subsidy is reducing the costs of products to end consumer. While there were a few specific examples in the basket of 34 items where margins increased, on average, the margins for the basket of 34 items/products were either stable or decreased from March of 2011 to December of 2014.
• See other observations in sections 5.1.1 and 5.1.2 with respect to pricing practices.

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

Observations:

• Every item added to inventory is evaluated for its eligibility. The Recipient has implemented the following processes to ensure the validity, accuracy and completeness of the monthly reports:
  • The Item Maintenance group is responsible for entering every inventory item (both subsidized and non-subsidized) in the merchandise management system and the pricing system, which includes the category, a description of the item, the gross weight, the NNC code, case quantity, cost and retail price.
  • Updates and modifications made are subject to approval and sign-off on a needed basis by the Category Manager. We assessed the design and implementation of said control and noted the control to be properly implemented.
  • The merchandise management system provides the options of editing Store and Item Attributes which are used to modify the eligibility of communities and products, in addition to the level of subsidy applicable.
  • Items are labeled with a NNC Item Code to determine eligibility and level upon auto-ordering process in the merchandise management system. NNC eligible communities will be automatically identified by the coding from the store ordering; similarly, the products ordered will be flagged as being eligible (or not) for the subsidy.
  • As the ordering process is automated, each purchase order is ultimately matched to an invoice and ensures that all items on the purchase order adhere to eligibility prior to be subsequently claimed.
  • Since the items are identified as eligible or ineligible in the merchandise management system (items with a NNC code are eligible), the system automatically generates a report of all the subsidized items ordered in the period and ultimately reconciled to the itemized claim report provided to Crawford (the claims processor) to ensure all items sold are being claimed. The reasonableness check is done by the Commodity Tax Administrator, Finance throughout the preparation of the claims and prior to being submitted to Crawford.
• For the eighteen-month period under assessment, we examined the design and the implementation of the various controls associated with the NNC program. Controls established by the Recipient around the NNC product information are as follows:
  • Reasonableness checks on weights, SKUs, quantities, prices.
  • New item set-up, discontinued items, changes in items listing,
  • Product exception report generating.
• We tested on a sample basis the claims submitted to AANDC:
  • We selected 6 monthly claims and from each of these monthly claims sub selected 2 communities and a total of 75 individual products throughout the 18 month period under examination.
  • Each individual item selected was traced from the itemized food report to its respective invoice from the supplier, the weight listing, the freight listing and ultimately the retail prices (per the merchandise management system and at point-of-sale).  The point-of-sale price was confirmed by examining a receipt which showed the price charged to the end customer.
  • Based upon the samples tested, no significant errors were found in the calculation of the subsidy (we noted minor errors totalling $85 on an amount tested in total of $16,475). 
• Based upon the sample tested, no errors were noted in the eligibility of products.

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

Observations:

• Item weights are all provided by the suppliers and entered into the merchandise management system and the pricing system by the Item Maintenance group.  Items and their weights are standardized per supplier; therefore the Recipient inputs the data into the system for their automated order process. 
• A weekly report is generated by the Pricing Manager in conjunction with the Category Manager's review to account for any supplier changes in regards to product weight, price and cost.
• We traced weight selections from our sample of 75 items to the weights listed by the initial supplier in order to ensure the accuracy and completeness of the listing extracted from the merchandise management system.
• See observations in section 5.2.1; no discrepancies were noted.

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

Observations:

• Claims are processed within the first 10 business days of the month and are subject to a reasonableness check by the Canadian Operations Controller prior to submission.
• Validity and accuracy of the claims are reliant on the controls in the merchandise management system and the pricing system relating to the NNC program. Weekly updates of pricing, costs, weights and eligibility are done to ensure the accuracy of the data.
• Monthly claims selected for testing were agreed to the itemized report.
• See  5.2.1 for testing of the subsidy of individual items claimed.

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

Overview

• The Recipient relies on the controls built within the merchandise management system (including access controls) to determine the eligibility of communities, as well as the itemized products category and eligibility.
• As the claims process is automated, and NNC subsidy rates are fixed, any errors would pertain to the adjustment of product weights in the merchandise management system. The Recipient runs weekly reports to identify and ensure the validity of changes in the merchandise management system. Potential deficiencies in the process such as an incorrect identification of the subsidy are subject to various levels of controls and also through 3rd party verification by Crawford.

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

Observations:

• The Recipient provides AANDC with an updated food pricing report monthly along with the claims which identifies all food prices generated per the merchandise management system and inputted into the pricing system. 
• We observed that for the twelve (12) communities the food prices per the pricing system are accurate by verifying food pricing reports and also tracing back the information to in-store receipts.
• No discrepancies were noted.

5.3.1 Objective 1: Recipient must include on-receipt messages (accepted by AANDC)

Observations:

• The Recipient has an approved AANDC message included on the receipts of all their Northern stores in all 67 eligible communities.  The standardized message summarizes the total cost of the order, and the general subsidy rate applied per kilogram purchased.  As such, only a general informative message is include on the receipts.
• We obtained receipts for the 75 individual items tested and validated the inclusion of the AANDC approved messages however we noted that while the end consumer will be informed of the rate reduction received they do not see the dollar value of the subsidy.
• No discrepancies were noted.

5.3.2 Objective 2: Install posters and shelf hangers in every store benefitting from the program in areas where they are visible to customers

Observations:

• We obtained in-store photographs from the 12 communities selected which showed that the Recipient has posters installed and shelf hangers in key areas identifying the subsidy rate, the savings and the end retail price for consumers.

5.3.3 Objective 3: Ensure Recipients are using the most effective and cost-effective supply chain arrangements and routes to reduce the price of foods as much as possible for consumers

Observations:

• The Recipient indicated, they continuously search for the most effective and efficient supply chain arrangement in order to maximize savings.  The Recipient uses its large network across the country in order to coordinate the shortest transit given the perishability of the goods, the most cost-efficient and the most accessible methods of transportation. All eligible communities and eligible products are ultimately transported via air from various hubs across the country.
• Non-subsidized products are subject to transportation through winter roads (if accessible) or by water if possible. These alternative methods are not used for subsidized products.

5.4.1 Objective 1: Ensure that ineligible business and established are not receiving a subsidy

Observations:

• As a for-profit company and as part of regular business operations, the Recipient makes sales to establishments in ineligible communities ("contract sales").
• We noted that contract sales to organizations are managed differently than standard orders.
• Contract sales are processed uniquely under a separate store code for specific organizations with an on-going agreement. Any purchase made from the listing of establishment agreed under contract sales will be processed under that store code and are flagged as a non-eligible community and will not be included in the claims build process.
• We obtained the list of organizations with on-going agreements for the period under assessment. We assessed all customers on the list and, based on the nature of the recipient and the community, we assessed whether any ineligible businesses and/or establishments benefited from the program. There was no indication that ineligible organizations are receiving a subsidy; however, the limited extent of our procedures made it impossible to conclude on this matter.
• Based on our assessment, the list did not include any ineligible business or establishments; however, the Recipient does not inform its clients that they cannot sell and/or ship subsidized items to restricted organizations.