Oh my goodness! I am shocked that so many people have been brainwashed to think that children who refer to sex or touch their bodies have been molested!
Babies touch their "private parts"! It is perfectly normal for people to explore their bodies with touch and otherwise. Young children are curious about their bodies and the differences between boy bodies and girl bodies. It becomes nasty and dirty when adults overlay their adult ideas over completely normal behavior.
Four year olds what to have babies and even say that they have babies growing in them whether they are boys or girls. Some boys are going to grow up to be girls and some girls are going to be boys when they grow up. They're going to marry their mother or father, grandparent, cousin, sibling, etc.
When I was about five or six the older boy next door took me aside and told me that if I pulled down my pants and showed him, he'd do the same. I wasn't interested. I went home and told my mother. I had two brothers. We were all born within four years. We took baths together until about the time I started school. One time the younger of my brothers streaked through the backyards buck naked with my mom in pursuit. I saw this from across the street with my friends. Nothing demonic here! He didn't want to take a bath, so he escaped.
Get a grip, folks! Go to the public library and get a book on child development. A classic is The Magic Years. Read about how normal children look and behave. There are children out there who are being molested. Don't trivialize true sexual molestation or the feelings of those molested children.
Children of four do not learn to lie as much as they have not yet learned the difference between truth and fiction.
In the early 1980's, there was a family in California who ran a day care center who was accused of molesting the children in their care. The McMartins' lives and livelihoods were trashed. Child psychologists came in and examined the children. Almost 30 years later, it has finally come out that there was no molestation that occurred. The children were unwittingly and unknowingly being coached in their testimony by the interviewers, something that is not uncommon with trial proceedings and especially when young,impressionable children are involved.
Give yourselves a break and don't create a problem where none exists. If you truly believe that something inappropriate is going on, do get the situation checked out by a competent professional.