Was the oil overfilled? Depending on the pump, you should NOT fill it to the top. Some pumps have a level float on the back of the pump that should be filled to the halfway mark. It's possible the pump oil is overfilled. Overfilled oil can cause cavitation and blow out the pump seals.
Onto the engine...when you took the pump off, how was the PTO (crankshaft) seal? Any damage or leaks? It's possible that overfilled pump oil blew out the end seal of the pump and then the pump oil combined with water were "pushed" past the engine's crankshaft seal into the crankcase.
First things first, check the levels of both the engine oil and pump oil and make sure they are set correctly.
Also, if the unloader valve and bypass valve are stuck, you may need to hold down the pressure washer gun handle down while starting, but I wouldn't even hook up the wand during testing.