A removal man told his company he found sickening child porn at an Anglican rector's house.
The company's lawyers told the Anglican Diocese of Newcastle in NSW it was legal adult gay porn.
However, then-bishop Roger Herft and diocesan registrar Peter Mitchell were uncertain especially when accused priest Peter Rushton refused to show an assistant bishop his full porn collection.
To clear the matter up the bishop and his adviser let a friend of Rushton's investigate.
On Wednesday, the chair of the child sex abuse royal commission Peter McClellan described the diocese's approach to the 1998 incident as "extraordinary".
Rushton's friend Greg Hensen, a former lawyer, reported back it was indeed adult porn and Bishop Herft - now Archbishop of Perth - decided not to take the priest's licence away.
Instead the bishop advised Rushton to go on a retreat to reflect on the "deeper issues and shadows" that led to the porn incident.
The Anglican Church in 2010 acknowledged Rushton as a pedophile who arranged access to boys for pedophile mates. The acknowledgment came three years after Rushton's death in 2007.
Much of day seven at a hearing into how the Newcastle diocese handled allegations of child abuse was given over to the evidence and cross-examination of Mr Mitchell who was registrar from 1992 to 2002. He was jailed in 2002 when found guilty of defrauding the diocese of $193,000. He has paid it back.
Before Mr Mitchell took the stand, Gary Askie, one of three men who packed up Archdeacon's Rushton's house in the diocese of Maitland said he described the child pornography in a statement asked for by his manager at John Farragher Removals.
He was warned not to talk about it.
The commission has been told lawyers representing the company wrote to the diocese and said the sexually explicit material was not child pornography.
Mr Mitchell was questioned about a file note he made of a meeting with Bishop Herft and Greg Hansen about the Rushton matter.
He noted that Rushton's refusal to show all the pornography he possessed to Bishop Robert Beal who was dealing with the matter "compounded uncertainty" about whether the diocese had a legal matter or an ecclesiastical matter to resolve.
They asked Mr Hansen to check.
Justice McClellan: "Did this meeting truly agree to Rushton's friend being the person who would go view the material and report back on its contents?"
Mr Mitchell: "Yes". He said Mr Hansen was seen as a trustworthy solicitor.
Justice McClellan described it as an "extraordinary position to take", handing the investigation over to Rushton's friend/solicitor.
Last week the commission was told by former archdeacon Colvin Ford that Rushton in 1999 asked a junior priest to destroy pornography, including child sex porn.
On Wednesday Mr Mitchell said he was not a party to this and said protecting the church was never a consideration in dealing with the Rushton matter.