Compliance Assessment Summary Report: B.K. MacKinnons Inc. (d.b.a. The Northern Shopper)

Background

Indigenous and Northern Affairs Canada ("INAC"): B.K. MacKinnons Inc. (d.b.a. The Northern Shopper)
  (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 February 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 customer of the NNC program. 
• Our testing noted that all subsidies observed were passed onto the customers, and all subsidy items evaluated were for NNC eligible goods.
• The Recipient establishes retails prices at a markup above its product cost. Per discussion with the Recipient, the markups vary depending on if the sales are made to commercial versus individual accounts. The Recipient generally marks up the price of goods to commercial customers of between __% and __% of the product cost purchased from wholesalers; other markups on product costs should generally be nil. Throughout our testing, we recalculated the profit margins of items evaluated and noted the markups were not consistently applied. We cannot conclude on whether the profit margins applied eroded the subsidy.
• Furthermore, freight markups were not consistently applied, and administration fees charged to the customer could not be observed due to inconsistencies in information listed on invoices. To assess if the Recipient is earning unreasonably high profits from charging excess fees and markups to the customer (which could indicate that the Recipient is operating the program outside the NNC program's intent of making nutritious food more affordable and accessible to eligible communities) Deloitte performed an overall analysis of the Recipient's financial results and found that the Recipient has incurred losses since operating under the NNC program.
• 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.
• The claims process is performed manually and performed by one person. There is no independent review of the claims aimed to detect errors. Throughout our testing, no errors were noted in this respect. However, inconsistent application of profit margins policies were observed. Per discussion with the Recipient, they have recently hired an additional employee to prepare the claims and an independent review will be performed. We were unable to observe this as this new process was implemented subsequent to the funding period being evaluated.
• During our review, we did not observe any sales to ineligible establishments.

Recommendations

• No additional recommendations to raise given that according to the Recipient, new controls and processes were implemented subsequent to the funding period. We were unable to observe these new controls and processes as they were implemented subsequent to the funding period being evaluated.

Current Status

The final report has been issued.