The elf is a little figurine that parents hide around the house. Its location changes every day, so you never know where it is. So not only is it spying on the kids...but each night it goes and tattles to Santa if the kids have been naughty.
When I first heard this it sounded kind of frightening, until I realized how poor Mr. B has been living with his very own Elf on a Shelf:
Just like the elf, Miss M can pop up anywhere:
She will uncomfortably watch you:
And she has no problem tattling:
The true story.