I would have the flight school fess up to the FAA and show they have a policy in place to prevent this from happening in the future. As for the CFI, the best learning experience for anyone is mistakes. I'm sure he has beaten himself up enough over this. Learn and move on. Maybe put a letter in his file to be removed at a predetermined date, if there are no other incidences. This would probably further satisfy the FAA. The whole situation in the grand scheme of things is relatively minor.