No, it should not be Google doing the review, it has to be a non-biased third party. This should apply to a lot of things, including app store stuff. Google doesn't make the decision, but they do get a share of the fee (if they don't have to pay out), since it is a hassle for them and they should be protected against frivolous complaints.

And by the way, while I'm sure Google should have to restore the account in this case, I'm not so sure Google should have to compensate even for the investigation fee. Because honestly it is a tad clueless to take photos of a kid's privates and allow them in the cloud. He didn't do anything truly "wrong" (in the molestation/ child porn sense), but still should have known it wasn't a good idea, so paying $100 for his mistake and being without his account for a week sounds about the right "punishment."