McQueary (yes, that's his real name) heard the slapping sounds, saw Sandusky standing behind the boy in an anal sex position, and ran out. Sandusky didn't even realize he was there.
McQueary then ran and called Daddy, who instructed him to tell Joe Paterno. McQueary did nothing further, which I felt was pretty fucked up on his part, as Paterno wasn't law enforcement, and indeed the whole thing got covered up after that. Paterno also never went to law enforcement, but instead just handed it over to Schultz/Curley, who covered it up with the help of Spanier because they didn't want their precious college athletics program tainted.