If your kids are into the whole Santa thing, they are definitely aware that he sends elves to keep an eye on the kids and report back to him. Now there's actually a book along these lines, Elf on a Shelf. But the elf is a little creepy if you ask me (which you didn't, but I'm just sharing...). Anyway, when I taught pre-K, we had a couple of fun traditions that we'd institute at Christmastime that the kids LOVED, and I figured these might work at home too. We talked about how elves smelled like candy canes and sounded like jingle bells. We let the kids know that if they heard bells or smelled candy canes, it just might mean elves are near. And we all know elves are trickly little fellas who are hard to catch. So most of the time the only way we know they're around is if we smell them or hear them. Rarely will we actually catch a glimpse.
So we also used this to our advantage. We hung huge jingle bells on the outside of our classroom door with a sign that asked passers-by to ring them (especially if they noticed that our class was extra rowdy). We'd also carry 2 bells on a string in our class notebook (that had to accompany us wherever we went) that we'd ring at key moments. As for the smell? We filled a tiny squirt bottle with water and a few drops of peppermint essential oil. When the kids weren't looking, we'd spray some of the water in the air. I cannot even tell you how excited the kids would get when they'd smell that peppermint spray or hear the jingle bells. We'd always emphasize the good times way more than the not-so-good by saying things like, "Wow! We heard jingle bells, and you were all obeying exactly what you were asked to do! Do you think maybe an elf saw that?" We would never say anything like, "Did you smell that? When you were hitting your friend, I smelled peppermint. I'll bet that elf ran to tell Santa." =) We wanted to keep this as a very positive thing.
So grab a couple of jingle bells and a spray bottle of water and peppermint oil and see how your kids' eyes light up when they use their senses to detect elves.