The D.C. Department of Recreation and Parks should establish "clear written guidelines" for collecting and disbursing revenue, such as those that it raised and spent to stage its now-defunct Potomac Riverfest celebrations, according to a report by the D.C. auditor.

The audit, conducted at the request of D.C. Council member Frank Smith Jr. (D-Ward 1), reviewed the agency's special Riverfest fund and specific expenditures for a controversial VIP boat cruise that was held despite the cancellation of Riverfest this year.

In the report, D.C. Auditor Otis H. Troupe said he found no violations of city laws or regulations, primarily because the recreation department "did not have sufficient written guidelines and regulations pertaining to {its} Riverfest activities."

Recreation officials, according to the report, "have been negligent and perhaps intentionally lax over the years in their failure to establish, publish and adhere to clear guidelines . . . " governing Riverfest and other activities financed with Riverfest revenue.

"This was an ongoing financial activity that was essentially unregulated and didn't come before the council for budgeting and review," Troupe said in a separate interview.

Paul Woodard, the agency's director, disputed the auditor's findings. He said guidelines for Riverfest spending have been in place since the festival was first held in 1984 and that copies of those guidelines had been provided to Troupe's office.

Troupe said he never saw such guidelines.

Riverfest '90 was scheduled for June 2 and 3. But a month earlier, D.C. Mayor Marion Barry canceled the $400,000 annual celebration, citing budget constraints and community concerns about the huge crowds who attended the waterfront gathering in Southwest Washington.

Despite the cancellation, Barry went ahead with plans for a $17,000 boat cruise to entertain former Riverfest workers and sponsors as well as outstanding D.C. government employees.

The cruise, including $8,400 for catering services, was paid for from a $109,000 Riverfest account of unappropriated funds collected from private donations and vendor fees.

The mayor and recreation officials said the fund traditionally had been used to pay for some Riverfest costs and to help sponsor several other citywide celebrations that did not generate their own revenue.

Barry promised that the remainder of the fund would go to open some city pools early this year.

Troupe's audit recommended that either the mayor or the council set up regulations in the future on the use of non-appropriated and non-grant funds by city agencies.

The guidelines should spell out "how, and on what, can public funds collected through private donations, user fees, fines, licenses, etc. be spent," the report said.

Woodard said yesterday that recreation officials are having discussions with community leaders in Southwest about "doing a different type of Riverfest" in the future.

It might be a one-day festival and one where waterfront vendors would be more involved in selling products, Woodard said.

In its six years of existence, the popular Riverfest celebration grew dramatically in cost to the city. A 1988 Washington Post review of expenditures for the first four Riverfests showed that the city had picked up $931,000 of the total $1.2 million-plus cost, nearly half of which was spent on promoting and publicizing the festival and on private functions to thank sponsors and organizers.

Some of the costs, according to that review, could be attributed to piecemeal, last-minute and sole-source procurement practices. Contracts for the Riverfest '90 cruise, Toupe's audit said, were also let on an emergency, sole-source basis.