Compliance Assessment Summary: Report Arctic Connection Inc.

Background

Indigenous and Northern Affairs Canada ("INAC") selected Arctic Connection Inc. (the "Recipient") for a compliance assessment for the April 1, 2014 to March 31, 2015 funding year.

INAC contracted Deloitte to perform a compliance assessment of the Recipient. The objectives of the compliance assessment were to provide the Government of Canada with information on whether the Recipient complied with the terms and conditions of the Agreement. Specifically, our compliance assessment was meant to consider whether:

• The Recipient has administrative controls in place that support compliance with the terms of the Agreement and that they are designed and implemented appropriately;
• The Recipient has financial controls in place that support compliance with the terms of the Agreement and that they are designed and implemented appropriately;
• The Recipient has reporting processes and systems that support compliance with the terms of the Agreement, and that they are designed and implemented appropriately to ensure the Recipient possesses accurate and reliable information in support of their claim related decision making; and
• Management practices for the provision of the subsidy to the ultimate consumers are effective and meet the goals of the NNC initiative.

Deloitte LLP, an independent audit firm, was commissioned to undertake the compliance assessment. The compliance assessment took place in March 2016.

Findings

Based on the sample tests, discussions with the Recipient and the other procedures performed, we observed the following:

• The Recipient passes on the subsidy to customers by applying it directly to their invoice. We noted the subsidy was clearly listed on customer invoices to inform customers of the NNC program. 
• Our testing noted that all subsidies observed were passed onto the customers, however certain items classified as ineligible could have been claimed.
• The Recipient establishes retail prices at a markup above its product cost. Per discussion with the Recipient, the markups vary depending on the goods but are consistent among communities and generally fall within __% to __% of product cost. Throughout our testing, we recalculated the profit margins of items evaluated and noted they were consistently within the range of __% to __%, except for one item below that range at __%. The subsidy was not included in the determination of the retail price, which means the profit margins applied were not eroding the subsidy.
• To further test the subsidy was not being eroded, we also compared the profit margins applied to our samples tested with profit margins applied to a sample of 12 ineligible and unsubsidized product items. The margins were either consistent with or higher than the profit margin charged by the Recipient on eligible goods, except for one small dollar value item which had a __% profit margin (a __% difference resulted in $0.21).
• The Recipient has an agreement with an airline for preferred rates with the objective of ensuring the most effective and cost-effective supply chain arrangements and routes to reduce food prices for consumers in the North. In comparing the agreed upon rates per the Recipient's airline with market rates published online, certain rates were favorable while others were higher than market rates
• The claims process is manual and performed by one person, with no independent review aimed to detect errors. Throughout our testing, errors were noted in items that were eligible items classified as ineligible and therefore not claimed
• During our review, we observed that the Recipient sold to two ineligible establishments.

Recommendations

We recommend the Recipient consider implementing additional controls as follows:

• Implement a process whereby there is an independent review of claims prior to submission to NNC for processing.  This has the potential to reduce the number of errors in the claims.
• The Recipient should ensure that the preparers and reviewers of claims are familiarized with the most recent NNC coding and obtain clarification from NNC representatives where coding classification is unclear.  This will ensure that claims are maximized for the consumer.
• The Recipient should establish a process to ensure that the ultimate consumer is an eligible consumer per the terms and conditions of the Program. We recommend that the Recipient implement a process to ensure that ineligible parties do not have access to goods shipped by the Recipient under the Nutrition North Canada program.
• The Recipient should establish a clear policy in regards to profit margins in order to ensure that markups calculated on goods and invoices are correctly applied and do not erode the subsidy.  The Recipient should be able to demonstrate that the margins do not erode the subsidies.
• The Recipient should consider implementing a process to periodically review their agreed upon rates with preferred airlines with market rates published online in order to ensure they are shipping goods at the most cost-effective prices.

Current Status

The final report has been issued.