THOUGH THERE ARE as yet no official details and no indictments, there is a grand jury investigation under way that sources say involves the city's current Democratic Party chairman and Mayor Barry's longtime chief political adviser. According to the report, former deputy mayor Ivanhoe Donaldson is under investigation concerning the handling of city funds when he was head of the Department of Employment Services. Quite aside from any eventual outcome of this investigation, the reported origins of this case raise a broader question about some of the city's past accounting practices -- a question that the local administration itself has been looking into and seeking to correct.

The story begins, in fact, with a routine auditing of the Department of Employment Services by the office of city inspector general Joyce Blalock. Mayor Barry asked for a further examination of the department's books after, he said, two department employees and a private contractor were found to have used city funds to purchase lighting fixtures and other items for their homes -- not during Mr. Donaldson's tenure. All three of those officials have been fired, and one has pleaded guilty to theft.

The inspector general's staff then examined checks issued from a special administrative account connected with the unemployment compensation fund. Alphonse G. Hill, deputy mayor for finance, says this account -- which officials say can have up to $250,000 in it at any time -- was outside the city's central management system. He says Mr. Donaldson had the power to authorize checks from the account when he was head of the department. According to District government officials and other sources apparently familiar with the grand jury investigation, the latest focus is on about $30,000 in city government checks issued during Mr. Donaldson's time as department chief.

Two of the three people in whose names the checks were made out are longtime friends of Mr. Donaldson. One check for $4,500 reportedly was issued in the name of an independent writer who says he never worked for the city, never received any city money and who says the signature of his name on the back of the check was not his. Who did sign the name and where the money went are critical questions and have yet to be answered. While Mr. Donaldson has declined to comment publicly, others say he says he did nothing wrong.

What we can say -- and have said before -- is that the existence of any city government funds outside of the city's central financial management system is bad. Now the local administration has transferred the account in question to the controller's office as part of an overall effort to tighten control of spending by this department. That is an important move to strengthen what has become a sound and increasingly sophisticated financial management system. The administration has reacted swiftly and well to the initial findings. But the rest of the story is yet to come.