Compliance assessment report Fédération des coopératives du Nouveau-Québec

For Funding Agreement no. 1213-01-00009 between Aboriginal Affairs and Northern Development Canada and Fédération des coopératives du Nouveau-Québec

Deloitte LLP
100 Queen Street
Suite 1600
Ottawa, Ontario  K1P 5T8

Telephone: 613-236-2442
Fax: 613-751-5427
www.deloitte.ca

October 1, 2015

Private and confidential

Aboriginal Affairs and Northern Development Canada
10 Wellington Street
Gatineau, Quebec
K1A 0H4

Recipient Compliance Review of the Nutrition North Canada Program

Dear Sir or Madam:

Deloitte is pleased to submit this report which highlights our findings stemming from the compliance assessment of funding agreement #1213-01-000009 between Aboriginal Affairs and Northern Development Canada and La Fédération des Coopératives du Nouveau-Québec (FCNQ) for the Nutrition North Canada program, for the period from July 1, 2012 to July 31, 2013.

If you have any questions with respect to the information contained within this report, please do not hesitate to contact us.

Sincerely,

_____________________

Chartered Professional Accountants
Licensed Public Accountants

Table of contents

1 Executive summary

At the request of Aboriginal Affairs and Northern Development Canada ("AANDC"), Deloitte LLP ("Deloitte" or "we" or "us") performed a compliance assessment of the funding agreement between AANDC and La Fédération des Coopératives du Nouveau-Québec ("FNCQ" or the "Recipient") in respect of Nutrition North Canada.  Nutrition North Canada ("NNC" or the "Program") is a Government of Canada subsidy program to provide Northerners in isolated communities with improved access to perishable nutritious food. NNC is part of the Government of Canada's Northern Strategy. Funding agreement #1213-01-000009, (the "Agreement") was signed by both parties on April 4, 2012. The purpose of the assessment, in accordance with our engagement with AANDC, was to provide information on:

The period covered by the compliance assessment is from July 1, 2012 until July 31, 2013. We determined our sample sizes by applying professional judgement based on the frequency of claims and the level of risk associated with the Program.

Our compliance assessment took place from January 19, 2015 to January 23, 2015, at the Recipient's headquarters in Baie-d'Urfé, Quebec.

We met with the Recipient to identify and document their key control activities, their procedures and processes related to the claim of funds from NNC, program delivery and reporting. We subsequently performed detailed audit procedures on the accuracy and validity of the Recipient's claims and on the margin earned by the Recipient on the subsidized products.  We did not perform an audit of the claims.

Based on the procedures performed and as more fully described in our report, we did not find any significant deviations in the samples we chose; however, we identified improvements in the form of recommendations to improve the Recipient's control environment in relation to the Program.

We would like to thank the staff and management of both AANDC and the Recipient for their co-operation.

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2 Introduction

2.1 Program information

NNC is a market-driven food subsidy program administered by Aboriginal Affairs and Northern Development Canada ("AANDC") that seeks to make perishable, nutritious food more accessible and more affordable to residents of isolated northern communities that lack year-round surface and marine transportation links to southern centres. The Program came into effect on April 1, 2011, replacing the previous Food Mail Program, which was a transportation subsidy program delivered by the Canada Post Corporation on behalf of AANDC.

There are currently 103 communities eligible for the program (84 full and 19 partial), located in Nunavut, Northwest Territories, Yukon, Labrador, Quebec, Ontario, Manitoba and Saskatchewan. Two levels of subsidy rates per kilogram have been established for each community; Level 1 (higher) for the most nutritious perishable food and Level 2 (lower) for other eligible items. Communities where operating and transportation costs are higher are entitled to higher subsidy rates. The subsidy is only applicable to eligible items shipped by air to eligible communities.

Northern retailers and southern suppliers registered with the Program are responsible for managing their supply chain and claiming a subsidy from NNC for eligible food and non-food items that they ship to eligible communities. On a monthly basis, they must submit a claim (kg x subsidy rates), a detailed shipment report (kg per item, community, client type, etc.), invoices and waybills to receive the payment (some are entitled to advance payments based on forecasted weights). These are submitted to the Program's claims processor under contract with AANDC (the Saskatchewan Institute of Information Technology in collaboration with Crawford Class Action Services). The claims processor verifies the claims and provides NNC with a recommendation for payment. Registered northern retailers must also submit, directly to NNC, a monthly pricing report for a pre-determined list of food items. These and other program requirements are identified in funding agreements between the recipients and AANDC.

As of September 22, 2014, NNC has 27 southern suppliers and 8 northern retailers (including 2 country food processors) have registered in the program. Northern retailers are those entities that operate food retail one or multiple stores in eligible communities. Southern suppliers are food providers operating out of non-NNC communities that supply eligible items directly to small northern retailers, commercial establishments (restaurants, etc.), social institutions (daycares, etc.) and individuals (referred to as direct or personal orders) located in eligible communities. Country food processors are plants located in Cambridge Bay and Rankin Inlet in Nunavut that transform fish and meat for distribution to eligible communities within the region. 

2.2 Recipient information

La Fédération des Coopératives du Nouveau-Québec (« FCNQ » or the « Recipient ») is a registered northern retailer located in Baie-d'Urfé, Quebec. The Recipient is a cooperative comprised of 14 Nunavik village cooperatives. The Recipient receives and fills orders for those 14 eligible communities located in Nunavik (see full list of communities served in Appendix A).

On April 4, 2012, AANDC and the Recipient entered into funding agreement no. 1213-01-000009, which took effect on April 1, 2012 and is scheduled to expire on March 31, 2015. Subject to the terms and conditions of the Agreement, the Minister will make contribution payments to the Recipient for amounts not to exceed $7,000,000 per year as part of the NNC program.  AANDC may issue additional payments depending on the circumstances such as reimbursement after the Recipient meets the conditions of payments.

2.3 Purpose and scope

As part of its accountability measures, AANDC must ensure that program recipients comply with the requirements of their respective funding agreements. Given that the Program relies in part upon the practices, processes and procedures that have been adopted by the Recipient, by performing an assessment of selected agreement holders, AANDC will obtain information as to whether adequate financial control practices are in place and whether the initiative is managed properly.

AANDC 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.

Our procedures addressed all these areas, and our findings and recommendations have been included in our report for AANDC's consideration. The period covered by our procedures relating to the Recipient was from July 1, 2012 to July 31, 2013.

3 Approach and Methodology

3.1 Approach

Deloitte developed a specific approach to assess the Recipient's compliance with the terms and conditions of the Agreement with AANDC, including assessing the design and implementation of financial control practices, reporting, and overall administration of the Nutrition North Canada program to meet the objectives of the initiative.

We obtained the monthly subsidy claims submitted for the period from July 1, 2012 to July 31, 2013. Deloitte conducted an interview on January 19, 2015 with the Recipient's representatives to gain a more in-depth understanding on the organizational practices, processes and methodology in order to assess the risk related to compliance with the funding agreement between AANDC and the Recipient.

Based on the results of the interview, Deloitte determined a sample size based on the frequency of claims over the period in question through professional judgement.

3.2 Methodology

The compliance assessment took place from January 19 to January 23, 2015. Before arriving on site, Deloitte reviewed the information provided by AANDC and/or the Recipient, including:

  • Nutrition North Canada Program – National Manual for Program Recipients (April 2014);
  • Contributions to Support Access to Health Foods in Isolated Northern Communities – Terms and Conditions (May 28, 2014);
  • Funding Agreement #1213-01-000009, between Aboriginal Affairs and Northern Development Canada and Fédération des cooperatives du Nouveau-Québec, effective April 1, 2012;
  • AANDC's general risk assessment of the Recipient (received January 2015);
  • Deloitte Audit Approach Manual;
  • Treasury Board Policy on Transfer Payment and the Guide to Grants, Contributions and other Transfer Payments.

Upon review of these documents, Deloitte developed objectives and criteria (as identified in Section 5), which, if met, would allow us to provide information to support AANDC in assessing compliance by the Recipient with the terms and conditions of the contribution agreement between the Government of Canada on the basis of the outcome of the particular procedure undertaken.

Deloitte examined certain accounts and records of the Recipient related to the Agreement, and conducted interviews with key personnel of the Recipient who were involved with either the administrative or financial components associated with the implementation of the Agreement. Control activities relevant to the delivery of the NNC program were identified and assessed for evaluating design and implementation only.

Our specified procedures report has been included in Appendix C.

4 Restriction on use of Report

This report is not intended for circulation or publication, nor is it to be reproduced for any other purpose than for the use of AANDC without our prior expressed written permission in each specific instance. We do not assume any responsibility for losses suffered by any party as a result of circulation, publication, or reproduction of this report contrary to the Provisions of this paragraph.

The procedures we performed do not constitute an audit or review engagement and, accordingly, we do not express an opinion or provide assurance in our report.

We reserve the right, but will be under no obligation, to review this report, and if we consider it necessary, to revise our report in light of any information, which becomes known to us after the date of this report.

5 Findings and Recommendations

5.1 Assessment of subsidies and profit margins

Overview

The Recipient must ensure that it passes on the full amount of the subsidy to consumers at the time of sale: fully passing on the subsidy means that the entire amount of the subsidy is deducted from selling prices, and that the Recipient is calculating profit margins on the product’s "landed cost", net of the subsidy.

The amount of the subsidy is calculated based on the weight (in kilograms) of products shipped by air, multiplied by the specific subsidy rates established by AANDC for eligible communities. There are two levels of subsidy rates – level 1 is a higher subsidy rate, for the most nutritious foods; level 2 is a lower subsidy rate. A detailed list of foods qualifying for either a level 1 or level 2 subsidy rates is maintained by AANDC, and reviewed periodically.

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

Observations:

  • As a cooperative, the Recipient does not expect to generate profits overall.  In setting the price to be charged to the village cooperatives management sets the margin for each category of products to be sold by the main cooperative in order to break even across all categories of items. The margins are approved by the Board of Directors. Margins maybe reviewed when there is a request by members to lower the cost of specific items (such as baby formulas).
  • This process is the same for subsidized and unsubsidized products but the margins for subsidized products will take into account the subsidy and will be lower than for unsubsidized products.
  • The margin of items sold is the estimated percentage required to cover expenses such as rent, electricity, wages, etc., incurred by the village cooperatives. Since the price charged to the village cooperatives has been reduced to reflect the subsidy, the margin on subsidized and unsubsidized products will be the same.
  • Member cooperatives are considered related parties, as the Recipient's Board of Directors is composed of two representatives of each cooperative, and the selling prices in the northern cooperatives are determined by the Recipient.
  • Internal financial statements are regularly reviewed to confirm that the differences between the sales amount and the cost of sales amount are not too significant in order to create excessive revenues or a loss.

Any annual surplus is redistributed to the 14 member cooperatives as approved by the Board of Directors. For the years ended December 31, 2013 and 2012, the surplus was 1.5% and 3% of total revenue, respectively.

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:

  • As indicated in Section 5.1.1., the pricing process is the same for subsidized and unsubsidized products but the margins for subsidized products will take into account the subsidy and will be lower than for unsubsidized products.
  • The recipient does sell to Construction FCNQ, a related party.  Based on our review of the process by which management sets pricing we noted that Construction FCNQ is charged directly for the shipping costs of goods sold, and no subsidy is claimed by the Recipient for those items.  However no administration fee is charged to cover overhead costs (these costs would represent less than 2% of the cost of the item sold).  This is effectively allocating all the overhead costs incurred by the FCNQ to the village cooperatives.

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 previously indicated, as a cooperative, the Recipient does not intend to make a profit on the sale of subsidized or unsubsidized items. See section 5.1.1 for a discussion of how the margin is determined.
  • The selling price is set as the product cost plus the authorized margin which is intended to cover the shipping and overhead costs less the subsidy received.  As noted, the margins are set by the Board for product categories overall. Subsidized products will necessarily have lower margins than unsubsidized product on the basis of the products costs. See illustrative example below:
  Product Cost Shipping Subsidy Landed cost Margin (to cover overhead) Selling price Margin on Product Cost
Level 1 $ 100 $ 10 (8) $ 102 15% $ 117.30 17%
Level 2 $ 100 $ 10 (4) $ 106 15% $ 121.90 17%
Ineligible $ 100 $ 10 - $ 110 15% $ 126.50 27%
  • The Recipient did not make any purchases from related parties of which we were made or became aware.
  • We selected a sample of 37 items and  tested each item to support management's assertion that the subsidy is fully passed on to the end consumer, our tests included:
    • Comparing the Recipient's selling price to the expected selling price (cost + authorized product margin) and obtaining explanations for differences;
    • Comparing the Recipient's selling price to the expected selling price based on their overall margin before the subsidy less the subsidy (cost + overall margin – subsidy) and obtaining explanations for significant differences; 
    • Comparing the profit margin implicit in the co-operative's selling price to their authorized margin and obtaining explanations for differences.
  • For one of the 37 tests performed, we did not obtain an explanation for the margin difference between the Recipient's standard authorized margin and the actual margin; it was not possible to obtain the actual weight of this particular item (weight of cabbages vary for each item) since the Recipient's systems only retained shipment details for a one-year period.
  • In addition, two of the 37 items selected for testing (bananas and jalapenos peppers) were sold to the end customer under an "uncoded" code; as these items did not have a bar code, the Recipient's employees must enter the information manually. As such, there is an increased risk of miscoding a product against the NNC Program subsidy.  Based on enquiry with management, coding errors noted at the cooperatives stores are due to the high employee rotation; coding errors increase the risk of incorrectly applying a subsidy rate. We understand, through discussion, that the Recipient is implementing solutions (e.g. reviewing their business processes for creation of new items) in order to minimize those errors. The Recipient also noted that when a Nutrition North Canada code was changed for a particular item, the Recipient did not receive sufficient notice in order to implement changes to its systems; this creates coding differences for specific items.
  • Based on our procedures and for the sample chosen, and except for the one deviation noted above, no errors were noted in calculating the subsidy.

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 previously mentioned in objective 5.1.3, the Recipient does not intend to make a profit on the sale of subsidized or unsubsidized items. Margins on items are approved by the Board of Directors, established based on actual costs and reviewed periodically by the Board of Directors. Any excess of revenue over expenses at year-end would be redistributed to the communities.
  • See results of audit procedures on margins in section 5.1.3.

5.2 Assessment of reporting and claim submission systems and procedures

Overview

In order to properly implement and monitor the effectiveness of the delivery of the NNC program, AANDC relies on information submitted by the Recipient. On a monthly basis, the Recipient must submit a subsidy claim form, an itemized food shipment report, and electronic copies of all invoices and waybills associated with the claim. The subsidy claim form must be signed by the Recipient, certifying that the subsidy has been fully passed on to the consumers.  The format of the reports is prescribed by AANDC, and templates are provided to the Recipient.

The claim submission and itemized shipment report provides the total weight of items (in kilograms), shipped to eligible communities. The report is broken down by individual NNC item identification number and community.  The claim is subsequently submitted through NNC's claim submission software, and each claim is reviewed by a third party claims processor for any deficiencies. Identified deficiencies are forwarded to the Recipient and must be reconciled prior to payment.

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

Observations:

  • Recipient management has implemented the following processes to ensure the validity, accuracy and completeness of the monthly reports:
    • The Ordering Management Support clerks (OMS) enter every new inventory item (both subsidized and non-subsidized) in the DMS system (Data Management Software), which includes the category, a description of the item, the estimated weight and the NNC code (if applicable);
    • At the end of each day, the Assistant Manager - Store Services validates these entries by exporting a report of every subsidized item created and confirms the NNC code and the estimated weight. Adjustments are made for any discrepancy noted;
    • He also exports a report of all the items created without a NNC code in order to identify items that are eligible for a subsidy but not coded as eligible;
    • Any adjustments needed are performed by the Assistant Manager - Store Services;
    • The information is automatically transferred in the WMS system (Warehouse Management Software) as the two systems (WMS and DMS) are linked. The new items are identified as new and must be validated by a warehouse employee before any items can be received in the Recipient's warehouse;
    • When a new item is received for the first time, the clerk at the warehouse must validate the item before scanning it; such items are therefore set aside for validation;
    • The clerk measures and weighs the item separately and within its packaging (e.g. box of 12 peanut bags) and enters the data in the WMS system. We observed FCNQ entering the description of the item into the system along with the scanning. When this is performed, the items shows as "V" for validated and can therefore be scanned and processed.
  • Since the items are identified as eligible or ineligible in the DMS system (items with a NNC code are eligible), the system can automatically generate a report of all the subsidized items sold to the cooperatives for a specific period.
    • The Accounting Clerk-Invoicing is responsible of generating the monthly report which is subsequently exported into an Excel spreadsheet;
    • The report is tested for mathematical accuracy and the totals are entered manually into the Monthly Subsidy Claim report; the Assistant Manager - Store services imports the sub-totals into a spreadsheet to compare on a monthly basis the subsidy claimed in order to identify significant variances which could indicate mathematical errors in the report;
    • The report, along with the detailed spreadsheet, is sent to AANDC and the Assistant Manager - Store services.
  • For the thirteen-month period under assessment, we selected three (3) reports for a detailed analysis and performed the following procedures:
    • Reconciled the claim to the detailed report
    • Recalculated the detailed report
    • Reviewed the listing of items claimed in the detailed report for ineligible items
  • From these three (3) reports we selected a sample of 37 subsidized purchases and performed the following procedures:
    • Ensured that the item is eligible for subsidy
    • Examined shipping documents to confirm receipt of goods and weight
    • Ensured the subsidy claimed was calculated in accordance with the agreement
  • Based on these procedures:
    • The reports reconciled with the information sent to AANDC.
    • We did not identify any ineligible items.
    • For one of the 37 tests performed it was not possible to obtain the actual weight of this particular item since the Recipient's systems only retained shipment details for a one-year period.
    • We did, however, note a difference between the Excel report extracted from the DMS system (for October 2012) and the information on the report sent to AANDC. A difference of $600 (the Recipient under-claimed amount of approximately $600) arose due to an error in the manual recalculation of amounts owed by AANDC.

Recommendation: As there could be other unidentified differences between the amounts reported to AANDC the amount to which the Recipient is eligible for a subsidy, we recommend that the Recipient's the Assistant Manager - Store Services perform an independent review of reports prior to submission to AANDC to ensure the accuracy and completeness of such reports.

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

Observations:

  • See observations in section 5.2.1;

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

Observations:

  • See observations and recommendations in section 5.2.1.

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

Observations:

  • See observations and recommendations in section 5.2.1.

6 Conclusion

Based on the procedures we performed, one exception was noted. For one of the 37 tests performed, we were unable to obtain an explanation for the margin difference between the Recipient's standard authorized margin and the actual margin; it was not possible to obtain the actual weight of this particular item (weight of cabbages vary for each item) since the Recipient's systems only retained shipment details for a one-year period.  This exception is not clearly an error but we are unable to conclude.

We also noted a difference between the Excel report extracted from the DMS system (for October 2012) and the information on the report sent to AANDC. A difference of $600 arose (the Recipient under-claimed amount of approximately $600) due to an error in the manual recalculation of amounts owed by AANDC.

In addition, two of the 37 items selected for testing (bananas and jalapenos peppers) were sold to the end customer under an "uncoded" code; as these items did not have a bar code, the Recipient's employees must enter the information manually. As such, there is an increased risk of miscoding a product against the NNC Program subsidy.  Based on enquiry with management, coding errors noted at the cooperatives stores are due to the high employee rotation; coding errors increase the risk of incorrectly applying a subsidy rate. We understand, through discussion, that the Recipient is implementing solutions (e.g. reviewing their business processes for creation of new items) in order to minimize those errors. The also noted that when a Nutrition North Canada code was changed for a particular item, the Recipient did not receive sufficient notice in order to implement changes to its systems; this creates coding differences for specific items.

We noted the following area for improvement:

The procedures we performed do not constitute an audit or review engagement and, accordingly, we do not express an opinion or provide any assurance in our report.

AANDC should also note that our assessment relates only to the period from July 1, 2012 to July 31, 2013.

Appendix A – Eligible communities

The table below identifies the NNC-eligible communities which were served by the Recipient during the scope of our compliance assessment.

Community Code
Akulivik QC-NQC-AKU
Aupaluk QC-NQC-AUP
Inukjuak QC-NQC-INU
Ivujivik QC-NQC-IVU
Kangiqsualujjuaq QC-NQC-KAL
Kuujjuaq QC-NQC-KAQ
Kuujjuarap QC-NQC-KIK
Kangiqsujuaq QC-NQC-KJU
Kangirsuk QC-NQC-KUK
Puvirnituq QC-NQC-PUV
Quaqtaq QC-NQC-QUA
Salluit QC-NQC-SAL
Tasiujaq QC-NQC-TAS
Umiujaq QC-NQC-UMI

Appendix B – Summary of claim submissions

Month Amount of Claimed Subsidy Selected for Detailed Assessment
Fiscal 2012-2013
July 2012 598,528
August 2012 613,482 X
September 2012 704,097
October 2012 563,508
November 2012 527,317
December 2012 668,970 X
January 2013 612,395
February 2013 623,816
March 2013 633,917
Subtotal $5,546,030
Fiscal 2013-2014
April 2013 $725,881 X
May 2013 622,726
June 2013 624,537
July 2013 569,869
Subtotal $2,543,013
Total Subsidy Claims $8,089,043

Appendix C – Specified procedures report

Deloitte LLP
100 Queen Street
Suite 1600
Ottawa, Ontario  K1P 5T8

Telephone: 613-236-2442
Fax: 613-751-5427
www.deloitte.ca

To: Aboriginal Affairs and Northern Development Canada ("AANDC")

Re: Fédération des Coopératives du Nouveau-Québec (the « Recipient »).

As specifically agreed, we performed the following procedures in connection to the above Recipient's claims against the Nutrition North Canada ("NNC") Program for the period from July 1, 2012 to July 31, 2013:

As a result of applying those procedures, we have noted the following deviations:

However, these procedures do not constitute an audit of the Recipient compliance with the Nutrition North Canada Program, and therefore we express no opinion on the Recipient's compliance with the Nutrition North Canada Program.

This letter is for use solely in connection with AANDC's assessment of the Recipient's compliance with the Nutrition North Canada Program.

Sincerely,

Chartered Professional Accountants
Licensed Public Accountants

October 1, 2015

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