He did report it, to his boss, as the law directed him to do in the situation he found himself in.
I don't know if you're arguing this point just to be contrary (which is of course fine) or if you really believe that Paterno deserves special consideration when all he did was (apparently) follow the letter of the law.
In any case, why is Joe Paterno such a Penn State and College Football icon?
In part it is simply because of his longevity on the national stage, but I suspect that if you asked this question of Penn State Alumni, officials and students several days before this scandal broke, they would go on and on about how he cared for his players and was like a surrogate father (or grandfather) to them. They would wax eloquently about how he shaped the character of so many of the young men who played for him and how much he cared for all students and, of course, the instiution. Somewhere along the line there would be references to the winning seasons and the National and Big Ten championships he had led his teams to.
For all of this, you seem to think he deserves special consideration in the form of being allowed to remain the rest of the season and retire thereafter.
Surely if it is his character and contributions in guiding the lives of young men that warrants the reverence he seems to have enjoyed at Penn State and within the world of College Football, then we should judge him on the basis of what we have come to expect from the Great Man, and not on whether or not he met the law's minimum requirement. Surely the young boys that were being sodomized and abused within the confines of the realm over which he reigned should have expected more from the iconic Joe Pa.
If he's going to enjoy living the life of a legend he should have demonstrated behavior more becoming of a legend that simply notifying his boss that one of his coachs was anal raping a ten year old in the gym showers. Hell, I'd argue he should have tracked the SOB down, punched his lights out or broke his kneecap with a bat, and then reported him to the police.
If his meeting the minimum requirement of the law is all that should have been required of him then he certainly doesn't deserve his reputation and status, and he certainly doesn't deserve special consideration from the University Board.