SEATTLE — Washington state auditors say they found weaknesses in the system used to detect improper payments in subsidized child care in its latest annual review of federal spending, contributing to an estimated $37 million in questionable payments in 2025, despite reporting improved overall compliance with federal requirements.
The Office of the Washington State Auditor released its annual Single Audit on Mar. 30, reviewing $23.7 billion in federal funds across 28 programs.
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Auditors reported a general pattern of improved compliance with federal requirements overall. At the same time, the audit flagged problems in the state’s child care subsidy payment oversight.
However, State Auditor Pat McCarthy said in an interview on Monday that the audit did not find fraud.
The State Auditor’s Office said it received inquiries earlier this year from lawmakers, the media, and the public about the potential for fraud in subsidized child care, driven by concerns in other states.
“For months, we’ve told anyone who asked about child care subsidies that we were auditing the program and would publicly share what we found,” State Auditor Pat McCarthy said. “Today, we can say that the state should take additional steps to detect and prevent improper payments. By doing so, the state can preserve more child care funding for the working families and providers who depend on that support.”
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The office said it had not been able to audit the state’s use of the federal Child Care Development Fund since fiscal year 2021. Auditors said that changes in fiscal year 2025 were made because the Department of Children, Youth and Families made fewer accounting adjustments than in past years, allowing auditors to trace individual payments to child care providers back to their funding source.
Auditors reviewed records from a statistically valid sample of subsidized child care providers.
They found issues including providers who did not respond to requests for attendance records, overbilled for services not supported by attendance records, or did not provide required signatures from parents or guardians.
Based on the sample results, auditors estimated DCYF made $27.2 million in questionable payments using federal Child Care Development Funds.
Auditors also reported a related finding in the Temporary Assistance for Needy Families program, estimating $9.9 million in questionable payments to child care providers using those federal funds.
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The State Auditor’s Office found the Department of Children, Youth and Families needs to improve how it detects overpayments, citing a lack of prepayment review of supporting documentation.
Instead, the department relies on post-payment audits to determine whether child care providers had required records, according to the audit.
Reviewing a year of the department’s audits, the State Auditor’s Office found 67% identified overpayments. Auditors said 22% of payments reviewed were overpayments, totaling $2.2 million.
Those cases were referred to a separate state office for collection, where providers can contest the findings.
Based on those results and statistical sampling, auditors recommended DCYF expand oversight until stronger prepayment controls are in place. The audit also identified issues with internal controls related to some providers’ health and safety requirements.
Despite those concerns, the state’s single audit, published March 30, showed overall improvement, with 50 findings compared with 82 the previous year.
“I want to acknowledge the commitment to accountability the governor and his team have shown in improving operations,” McCarthy said. “Audits may surface challenging issues for agencies, but they are critical to maintaining public trust.”
DCYF said it is working to address the findings while emphasizing that no misuse of funds was identified.
“DCYF is committed to strengthening internal controls and resolving the seven outstanding findings identified in the SAO’s audit of four of our programs,” the agency said in a statement.
Officials said the audit showed improved compliance and fewer findings, noting recent changes allowed for a full audit of the Working Connections Child Care program.
“To be clear, the agency has consistently met federal grant management requirements, and federal audits of our programs have not identified any misuse of funds,” the statement said.
The agency agreed with recommendations to update its payment system and increase staffing for prepayment reviews and internal controls. DCYF also pushed back on how some findings were characterized, saying amounts cited as “questionable payments” were not actual improper payments.
According to the agency, auditors questioned 14 payments totaling $6,123 due to missing documentation, while larger figures cited were projections — not evidence of fraud. The agency said it is working with providers to address issues such as attendance records and required signatures, and that suspected fraud is referred to the Office of Fraud and Accountability.
“We will continue reviewing our policies and procedures as we work toward improvements,” the statement said.
“Our audit did not conclude that fraud occurred,” McCarthy said. “What you can conclude is that there are issues — red flags that need to be followed up.”
She said the agency must strengthen oversight and internal controls when distributing funding.
“That’s basically what we need to have happen,” she said, emphasizing the need to “trust but verify.”
Despite an estimated $37 million in questionable payments, McCarthy said the fiscal year 2025 audit marked progress, with auditors able to trace payments to providers after years of limited visibility. For four consecutive years, auditors said they could not determine whether subsidized child care funds were spent appropriately due to missing documentation.
As a result, the fiscal year 2024 audit received a disclaimer opinion, meaning more than $413 million in federal funding was unauditable. McCarthy said auditors had been unable to fully review the state’s use of federal Child Care Development Funds since fiscal year 2021, but said DCYF is improving.
“I think DCYF is on a trajectory to make the appropriate improvements,” she said. “They reduced the number of findings from the previous year, and I think they’re on the right track.”
She said it will be up to DCYF to decide whether to refer flagged cases for further investigation.
“I have confidence this has been overseen by an independent set of eyes,” McCarthy said. “It’s important for the public to know our audit did not conclude that fraud occurred.”
