The champagne was on ice at The Dayton, Ohio, Journal Herald. A full-page ad extolling their brand-new Pulitzer Prize-winning editorial cartoonist Robert Englehart was in type.

Englehart had been the sole choice of the Pulitzer nominating jury - and in the world of journalism, where gossip is the soft under-belly of hard news, the word was out.

But when the Pulitzer Prize Board - the ultimate last word - made its final choice, The Washington Post's Herblock was picked for his third Pulitzer Prize. And Englehart did not wake up Monday a meember of the privileged club of Pulitzer Prize winners.

Monday night, whileThe Post toasted Herblock, Englehart was being feted in Dayton's local newspaper bar. At the height of the evening, Englehart shouted, "I never had so much fun losing." But the next morning, awakened at 7:30 by a reporter and asked about losing, Englehart mumbled, "I feel like I've been mugged."

Later Englehart graciously chuckled and said, "Give my best to Herblock. I mean that sincerely. I have a hard time faulting the final decision." Then, overcome by the magnanimity of it all, Englehart laughed once again and said, "Gee, what a good sport you are, Englehart."

Novelist John O'Hara never won a Pulitzer - never won any major prize for that matter. He refused to be consoled by friends who reminded him that he probably made more money than any Pulitzer winner. "Dammit," said O'Hara, "it's the MEDALS I want."

That is what the Pulitzer Prize is all about. It is the most coveted and prestigious medal in journalism and one of the most illustrious in the arts. The announcement can be assured of a front-page headline - particularly prominent in a paper that has won - no matter what other earth-shattering plague-and-pestilence news occurs that day. The awards have been a springtime ritual ever since 1917 when Joseph Pulitzer, one of the giants in an era of flamboyant "yellow journalism," endowed the Columbia University School of Journalism Pulitzer Prices in his will.

Over the years there have been grand squabbles over winners in both the arts and journalism. Critics have contended that the 15-man board (12 represent newspapers and three are from Columbia University) is elitist and picks its winners, as Robert Bendiner, a former editor of The Nation once charged, through "private lobbying, personal whim and a genial sortof legrolling."

This year the rules were changed to try to take the controversy out - an attempt that was monumentally unsuccessful. When the board overturned the jurors' confidential choices in at least four of the 12 journalism categories and two in the arts, several jurors cried foul."

"We tried our best to make them understand what their function is," said on Pulitzer Board member with an exasperated sigh. "We even changed their name to 'nominating' jurors so they would understand. They nominate and WE select. WE pick the winners."

If the selection had differed just once, you could "shrug it off," said Robert Phelps, managing editor of The Boston Globe and chairman of the national reporting panel. But, he added, when as many as six are overturned "something is wrong with the system."

The categories overturned were national reporting, editorial cartooning, editorial writing, history, poetry and commentary.

At The New York Times on Monday, they were cheering because Russell Baker had won for commentary. Then a disgruntled juror told the press that the nominators' first choice - overturned by the Pulitzer Prize Board - was really a veteran Wall Street Journal columnist who had won a Pulitzer 26 years ago: Vermont Connecticut Royster.

Baker could scarcely keep the chuckle from his voice when he heard the news. "Well, with a name like that, whyyyyy not?" The humorist mused, "I've never been quite clear on Pulitzer Prize thinking. The year they shot down Harrison Salisbury was a scandal."

Meanwhile, in Chicago, James Hoge, editor of The Chicago Sun-Times, was swallowing hard. Last year, The Sun-Times bought and ran a seedy North Side Saloon, titled ina a deft play-on-words, The Mirage Bar.

In a not-unlikely alliance, reporters became bartenders - and in so doing became privy to their clientele's payoff proclivities. The Sun-Times documented a systematic pattern of bribery and tax fraud that could cost the city an estimated $16 million in sales-tax revenues a year. The Mirage Bar scam, straight out of "The Front Page, was an elaborate extension of what for years had been fairly standard investigative journalism fare - posing as someone to get the inside story.

In the past, Pulitzers have been awarded to papers whose reporters posed as ambulance drivers or mental patients or social workers to expose fraud and corruption.

But this year, The Sun-Times entry for local investigative reporting touched off "the most fascinating debate ever heard at Pulitzer," said Board member Eugene C. Patterson, editor and president of The St. Petersburg (Fla.) Times. The relative merit of entries was sidetracked as the Board launched into a full-scale discussion on journalistic ehtics. In the end, a majority of the Board vetoed the Sun-Times entry - a strong contender among the four entries nominated by the jury in that category.

"All of us have been a party to some masquerade in the past," said Patterson, "and no one played holierthan-thou on the Board, but we've pulled up our ethical socks a whole lot. There's a stringent new code of ethics to the point that we very sparingly use these weapons of deception. I think The Mirage Bar had an element of entrapment."

Benjamin C. Bradlee, Pulitzer Board member and executive editor of The Washington Post said, "We instruct our reporters not to misrepresent themselves, period.

"We felt a Sun-Times award for this entry could send journalism on a wrong course."

The Sun-Times, rival, The Chicago Tribune, felt otherwise. Clayton Kirkpatrick, editor and vice-president of The Tribune, argued for The Sun-Times award. "I don't see any other way they could have exposed what they did." Asked if there was a new morality in journalism, he laughed and said, "A new morality as afr as Pulitzer Prizes. The Tribune has won more than once in the past with reporter posing as someone else. We had reporters take positions in hospitals for example, to investigate abuses."

And The Los Angeles Times' Jack Nelson, a Pulitzer Prize-winning investigateve reporter, said "This is a lot of bulls - about having to tell who you are. When you covered civil rights, you damn well didn't let the KKK know you were a reporter.

"I passed myself off as a textile worker to see if Georgia state officials would buy my vote. And they did. I passed myself off as a client in a whorehouse to find out about bribes. The Sun-Times seemed perfectly legitimate."

That assessment is, of course, shared by Hoge, who studied the legal aspects before giving the go-ahead on The Mirage Bar venture.

"The Board's capriciousness and arbitrariness is mystifying and profoundly disappointing. There was nothing in the Board's advisory to indicate they were judging from a different set of rules than in the past. I just hate to say anything because it always looks like sour grapes."

The selection process starts with teams of jurors - newspaper editors from the smallest to the largest publications - who weed out hundreds of submissions in a two-day stint in New York. They are appointed by the non-voting secretary of the Pulitzer Board.

"You make up these rules," said one former juror. "If three out of five of you, for example, have said no to something, you can safely say that you can put that one on the floor and go on to the next." Their recommendations go on to the Pulitzer Board.

By the time a journalist reaches the Pulitzer Board - made up of publishers and top editors - there is usually a long lineage of good-old-boy familiarity. Board members can serve three four-year terms; and Richard T. Baker, the secretary of the committee, said, "As far as I can see, they all take them."

They spend one day debating the final choices, after having seen the entries.

"There isn't so much politicking, but I can tell you that the choices for so prestigious an award are oftencasual," said one former member.

"Here is what happens. Somebody gets up and says, "I read this entry and I found it just as dull as hell." And another says, 'I feel the same way about it.' And another says, 'Oh, hell, let's give it to this guy then.'"

When the Board's decision goes against the jurors, the mood is not always cordial. Dale Davis - executive editor of the Philadelphia Bulletin and one of the jury members who championed Vermont Royster - said, "The jurors don't want to feel like they're a bunch of goddam clerks. The Pulitzer people are going to have to clean up their act. Jim Hoge and The Sun-Times really got screwed. The board is all-powerful and pretty well the good-old-boy network."

But sympathies do not always lie with the jurors. One former Pulitzer Prize-winning cartoonist said, "Herblock was far and away the better choice. To enter just one guy," as the editorial cartoon jurers had, "is plain silly."

Some angry members of the Board saw that single entry as an insult, forcing them to go along with the jurors. "We called them back and asked for at least a couple more nominations, but they refused," said Patterson.

The chairman of the cartoon jury, Stanley Asimov, assistant publisher of Newsday, said, "The only reason we sent in one entry was that he (Englehart) was clearly superior. When they asked us for others, the Board suggested, 'For example, Herblock.' I am sorry they view this as a challenging move on our part."

Pat Oliphant, Washington Star cartoonist and a Pulitzer Prize winner, said that once, "I sent off the Board a telegram of 'no confidence.' I feel the same way every year.

"They've made some woeful decisions.

"I remember in 1973 - when even the bad cartoonists were doing good cartoons because it was Watergate - the advisers, in their wisdom, decided not to award because nothing was up to Pulitzer standards. They've been consistently stupid. It's got to be straightened out. "This is supposed to be our Oscar!"

Phelps of the Globe charged that the Board is "elitist. No blacks or women. It's old establishment and ought to be expanded."

Many Board members, sensitive to the criticism, endorse two suggested changes that have come from jurors and other critics this year. They are under advisement.

One suggestion is to expand the Board to include women, blacks and lower-echelon journalists. "Many of us have been too long removed from the daily opeartion," agreed on Board member. The second proposal is for jurors to select four of five mominees in each category, much in the nature of the Oscar awards. They would be required to pick only from the nominees. In a profession that seeks openness, critics say, the Pulitzer Prizes have been nominees should be named in advance.

Although the Pulitzer Prizes have been criticized and debated for years, no single figure had dominated the Board like the late Arthur Krock of The New York Times. Even after he left, his influence was felt through his personal selection of successors.

It took Walter Winchell - an outsider removed from fray - to taunt Krock. One of Krock's two Pulitzers, in 1938, was awarded for his "exclusive authorized interview with the president of the United States." Some years after the award, Winchell asked in print why Krock should get an award for getting something that was in the nature of a "handout" or press release. "All Krock had to do was go over [to the White House] and pick up a story that the president wanted printed."

Because Alice Longworth called Krock and raved about James Michener's "Tales of the South Pacific," Krock persuasively pushed Michener on his way to fame, as he pushed Kenedy's "Profiles in Courage," according to Bendiner.

Sometimes works are rejected because of ideological or taste considerations. Hemingway's "For Whom the Bell Tolls" did not win in 1941 because the head of Columbia University, Dr. Nicholas Murray Butler, did not want the university associated with so "lascivious" a book. Two decades later, some Board members blanched at Edward Albee's "Who's Afraid of Virginia Woolf?" It was, they said, "filthy." It didn't win.

In fact, the list of nonwinners in the arts reads like a Who's Who of American letters: F. Scott Fitzgerald, Theodore Dreiser, Thomas Wolfe, John Dos Passos, Ralph Ellison, Lillian Hellman, Clifford Odets.

In journlism, there is no less controversy, Harrision Salisbury lost out in 1967 for international reporting after being the only American journalist to get inside Hanoi. Some critics at the time strongly suggested that several anti-Salisbury votes had been cast by conservative Board members for "ideological" reasons.

"That's just a bunch of bull," said one former Board member who didn't want to be named. "I was on at the tine, and I can tell you it was judged on merits. There was nothing spectacular about his reporting once he got there. The Pulitzer should not just go to a guy because he happens to get himself, admitted to every country that has no regard for the free press."

Board members today contend that politicking for personal favorites or your own newspaper's reporters is almost impossible. "That would be the kiss of death," said one. "One of our guys who did a spectacular job this year didn't even get a call, and there was nothing I could do." (Board members whose own publications are nominated must leave the room during voting in that category.)

A former board member added that there is an "unspoken feeling" not to give one paper too many awards in one year. However, another argued balanced, and pointed out that The New York Times or its reporters had won 46 times.

But Board secretary Baker recalls the Board decision regarding The Washington Post in 1973. The jurors had not nominated the Post for its investigation of the Watergate case. "The jurors had picked in March-and in a matter of weeks. Sirica had sent three to jail-and The Post and Woodward and Bernstein were looking terribly big as a first choice.

"The Board decided to turn it around," said Baker.

The only hitch was The Post already had three other awards locked up: David Broder for commentary; Robert Kaiser and Dan Morgan for international reporting, and William Claiborne for local spot news. "The Board took two away, foreign and national spot news," Baker said. "I suppose that was kind of hard for the three men who hda been nominees."

If the critics have their way, there will at least be some minor consolation for also-rans in the future.

Said Asimov, "All this should be made public. After all, simply being nominated for a Pulitzer is a sufficient honor for recognition. Nominees should be honored-and winners hailed." CAPTION: Picture 1, no caption; Picture 2, no caption