Bad girlfriend effect -- hee hee! Although bad boyfriend effect would be just as accurate, natch.
In ruling that the wizard would get the surprise round, I'm assuming that the guards are indifferent toward the wizard. If they were unfriendly or hostile, they'd get to roll initiative immediately.
I do play that a charmed character doesn't remember the spell being cast, but I also rule that the character can be convinced that she's charmed. If she gives a stranger a fantastic deal on magic weaponry and normally she's a total skinflint, then when the spell wears off, she'll probably have no trouble guessing that she's been charmed, and she'll probably head straight for the town guard (or the town crime boss, depending).
But if the spell is used subtly, the charmed person will never know. If a guard occasionally takes bribes from folks he knows, and this time he takes a bribe from a pretty young lass that he doesn't know, and he lets her by with a really low bribe, then when the spell wears off, he'll probably believe he was thinking with his lower half.
Charm Person, like silent image, is a very versatile spell. Used subtly, they're both fantastic; used crudely, they're both pretty worthless.
In this case, I think the guards could've told the captain that he was charmed and convinced him at least to hold the wizard captive until the barracks priest could come cast a detect magic on the captain. The captain would've been superfriendly to the wizard, but would've followed procedures. (Any well-organized town guard should have procedures to deal with enchantments and other magical attacks.)
Daniel