Yup, the report bad post icon sends emails out to the moderators of that forum. Depending on the mod who takes care of it, the person who reported the post may or may not be contacted....some mods do go and send a PM or something to the reporter, others don't. We don't have a set policy on that -- except of course for taking action (if warranted) when a post does get reported.
The report bad post feature is a great thing but is IMO sorely under-used by members here. Because of the sheer size of this forum, it is impossible for the staff to monitor every single post. So if you see a post that you feel is against the forum rules, click that icon!