Considering the fact that, over one hundred years ago, Freud wrote extensively about child sex play, I am neither surprised nor shocked. Child sex play is sexual but it is not sex, and, further, it exhibits an expression of curiosity about their own bodies and the bodies of others.
One can either choose to view this curiosity as healthy or unhealthy. The fact that this curiosity is attached to sex will make many automatically and without reflection conclude that it is unhealthy. I do not believe that it is unhealthy.
Certainly, what is not at issue in this situation are any notions of exploitation or of taking advantage. One would have a tough time arguing that this is rape and/or sexual assault. Thus, it is the mere fact that children are engaging in sex play that is causing outrage. Yet, whether this sex play is healthy or unhealthy, it is very difficult to deny that child sex play is natural (it has been observed in human children, puppies, kittens, calves, kids, etc., etc., ad nauseum).
Of course, what could be at issue is that the preschool has "allowed" this natural act to occur on their premises. Considering the fact that child sex play occurs on playgrounds and backyards across America and across the world, though, and in the presence of parents who are preoccupied in conversation, reading, being inside while their children are in the backyard, or being upstairs while their children are in the basement or in other rooms, I have a hard time assigning blame to the preschool; unless the expectation of the parents who send their children to this preschool is that the preschool teachers (babysitters) are more aware and more observant than the parents. In my opinion, that is both a hypocritical and absurd expectation.