It's clear that MM was upset and weirded out by what he saw in the 3 second glimpse through a shower mirror that night, however apparently it wasn't bad enough for him to call UPPD that night or EVER make a written statement to UPPD (or ask C/S why no one from UPPD ever came to get his written statement) so a criminal investigation could get started.
Also, when Curley called MM a few weeks later to follow up and communicate PSU's action plan, MM never expressed dissatisfaction, never said the police needed to be involved, and never said MORE needed to be done. To me this speaks VOLUMES. It tells me that MM was weirded out but wasn't CERTAIN that molestation/abuse was taking place and C/S's action plan of removing JS's guest privileges, telling him his inappropriate showering behavior was wrong/needed to stop, and informing TSM about the incident and PSU's new directives was sufficient enough for him, the one and only witness. It also tells me that MM's 2010 version to OAG/PSP where he claims he was CERTAIN JS was abusing a kid that night and reported it as such in 2001 is B.S. revisionist history.
I do agree with you that JS continuing to shower with kids after being explicitly told not to by LE/DPW is troubling and points to his guilt on some of the charges, however C/S were NOT aware of this directive JS received in 1998 (see Harmon's testimony) so there wouldn't be any "alarms going off" in their heads after they were made aware of 2001. Also in 1998 JS didn't even get his ChildLine clearance to work with kids revoked so you have to keep that in mind as well. LE/DPW pretty much told everyone in 1998, including JS himself, that it was all no big deal, nothing to see here, etc....If LE/DPW really did think JS was a potential molester/etc. but just didn't have enough evidence to criminally prosecute you'd think they would have at least revoked his clearance to work with kids right? But nope....never happened.
Since PSU was told by LE/DPW/CYS EXPERTS that 1998 (naked bear hug from behind in the shower) was no big deal you'd have to think that would have influenced how PSU handled 2001.