What we don't know, at this time, is what happened in that particular incident. The official report, covering all of the charges, mentions everything from "horsing around" in the shower to actual oral sex, but does not specify what happened at what time. Right now, we don't know if there was a sexual act going on that the GA (MM) saw or just some weird and inappropriate stuff. Apparently, that boy never came forward, so the story could not be confirmed at the time.
Paterno and MM were told that the AD and the VP in charge of the PSU police were following up. Paterno and MM, apparently among others, have testified that this is what they were told. The fact that the AD and VP chose to do nothing is appalling, and the fact that they testified they knew nothing when multiple sources testified otherwise is why they have now been indicted.
A couple notes: The PSU police are real police. They are basically a branch of the PA State Police that are given local authority for whatever region they are stationed. They have full authority to arrest, investigate, give a breathalizer, shoot, or whatever you want to think of on AND off campus. They actually have more authority than the State College police do because they are given full police authority on campus and in the State College area. I think many people went to schools that had campus security that had limited authority and needed to local cops for certain things. Not here - they are THE police.
So Paterno went/sent the GA witness to the head of his program and the head of the police. Had he gone to the State College police, they would have told him to go to the PSU police department. He went to exactly the right people and apparently was lied to.