It's just a stupid idea in general, even ignoring any religious metaphors. So the kids only have to be good if the Elf is looking, and not if they step into another room? Moronic.
The elf represents an evil mischievous person that is satanic in nature.
Children who have bought into this idea may even imagine that their elf is watching them and is doing mischievous things, no doubt blaming the elf for their own misdeeds, saying to their parents, "Don't you see? His eyes are rolling."
That starts the ball rolling. Soon the children will begin believing in the elf, so the elf may take on a life of its own. Next, the priest may have to be called for an exorcism.
Do not open this door. Keep evil away from your homes.