In the early 1980s, Alphonse G. Hill, who was then the District's controller, introduced one of his key advisers, Michael P. Smith, to Hill's longtime friend and graduate school classmate, James Hill Jr.

A short time later, Smith joined forces with James Hill, who opened a branch office of his Chicago-based Hill, Taylor & Co. accounting firm in Washington in 1981 to take advantage of the city government's increasing and highly lucrative minority contracting program.

Alphonse Hill, now deputy mayor for finance, said this week that he subsequently recommended James Hill's firm, among others, to receive District business, in part because Smith was intimately familiar with the city's new financial management system.

Hill's role in bringing together the two partners and recommending that their firm receive city business proved fateful: The D.C. inspector general criticized him in mid-1982, saying he should have kept more distance between himself and James Hill. Now a federal grand jury has begun investigating whether James Hill gave kickbacks or financial incentives to the deputy mayor in exchange for work on city contracts.

The deputy mayor and James Hill have strongly denied any wrongdoing. James Hill termed the federal investigation a "fishing expedition."

Interviews with officials of minority-owned and national accounting firms, former Hill, Taylor & Co. employes and other knowledgeable sources this week indicate that James Hill's firm was one of about a half-dozen aggressive minority concerns competing for city auditing contracts, the principal source of revenue for most of them.

Both Alphonse Hill and James Hill said this week that federal investigators and the D.C inspector general's office have never produced evidence that the firm obtained contracts illegally. The U.S. attorney's office and the FBI are continuing to investigate the circumstances surrounding the awarding of hundreds of thousands of dollars worth of city business to the Chicago accounting firm in the last five years.

Mayor Marion Barry, whose administration has been the focus of a number of corruption probes, declined to comment yesterday on a Washington Post report that Alphonse Hill is under investigation.

Last week, Ivanhoe Donaldson, former deputy mayor for economic development, began serving a seven-year prison sentence for defrauding the city of more than $190,000.

Alphonse Hill said yesterday that he recommended James Hill's firm last year for a federally funded contract worth nearly $300,000 to audit St. Elizabeths Hospital. Alphonse Hill and D.C. Controller Anthony Calhoun, who also favored the firm, were the District's representatives on a National Institute of Mental Health panel assembled to select a contractor for St. Elizabeths, the mental hospital in Southeast Washington that is jointly funded by the federal government and the District.

The deputy mayor defended his role, saying that the contract was paid for by the federal government and the firm was the best qualified to do the job.

"I wasn't paying them," Alphonse Hill said. "I wasn't signing the invoices . . . .I think I had some independence."

Calhoun, in a separate interview, said Alphonse Hill did not try to steer the contract to the firm and that federal representatives on the panel agreed it was the best one for the job.

Two years ago, James Hill's firm was selected, with another minority certified public accounting firm, to assist Coopers & Lybrand, a national accounting company, in a four-year contract to perform the city's annual audit, a pact that earned Hill, Taylor & Co. about $45,000 last year, according to a top Coopers & Lybrand official.

Alphonse Hill said the city played no part in selecting James Hill's firm for that job. He said that after a city review panel selected Coopers & Lybrand to take the lead in the auditing, that firm chose Hill, Taylor & Co. and Bert W. Smith Jr. & Co. as minority participants in the contract. The city required that 35 percent of the annual audit go to minority concerns.

John Silton, managing partner here for Coopers & Lybrand, said Alphonse Hill played no role in the firm's decision. The company, he said, chose the two firms after soliciting proposals from minority firms certified by the city. Two were necessary, he said, because individually each was too small to handle the work load.

One aspect of the federal investigation is whether nonminority firms are required to hire James Hill's firm to get city business, according to informed sources. Besides the Coopers & Lybrand contract, James Hill's firm has been hired by at least two other national accounting firms.

A summary of some city auditing contracts for 1983 through 1985, provided by Alphonse Hill, indicates that other minority firms have participated in such contracts with national firms. The summary shows that Hill, Taylor & Co. was a minority participant in a $305,000 D.C. Department of Employment Services audit awarded in May 1983 and two D.C. Department of Human Services contracts worth nearly $600,000.

Calhoun, who compiled the list, said the figures were not immediately available to show how much James Hill's firm received, but said that generally minority firms receive up to about one-third of the contracts.

Calhoun said the Employment Services and DHS contracts were awarded without competitive bidding because of pressure from the federal government to perform the audits quickly. Alphonse Hill said that in general auditing contracts are awarded after formal proposals are solicited and a review panel makes a recommendation.

However, the city may waive competitive requirements under extenuating circumstances. If the city had not moved swiftly on the two contracts, it risked losing millions in federal funds, Calhoun said.

Sources have said that the current federal investigation arose out of an ongoing FBI examination of contracts awarded by the D.C. Lottery Board, which in August 1983 hired James Hill's firm to ensure the integrity of the televised lottery drawings. Investigators began asking questions after the firm was selected without formal bidding.