Is there a way for my friend to go in and see what his houseguest is doing without changing the guests account.
I sure hope not. Our computers and users accounts need to be secure or it makes using our computers for personal business rather worthless.
I'm sorry but its really stupid to let a guest create a password protected account on one's laptop.
Here's the scary part for me - who's account was he using to create this new account? It seems like your friend allowed his guest access to his own admin account - big mistake. And I suspect he made this new account as another admin account, and that's bad. Very bad as it puts the owner's account in jeopardy too.
If me, I would take that computer back NOW. Delete any and all user accounts the guest created. Scan the computer with every anti-malware solution in your arsenal. Purge the computer of all crud. Go through Add and Remove programs and uninstall any programs you did not install or no longer need (leave any unsure of). Then, if this guest really does need a computer and network access, create a "Standard" or "Limited User" (NOT an admin) account for the guest and let him use that.
If the guest complains, show him the door or tell him to get his own computer.