There was actually a very good article in the Ottawa Citizen on that topic this weekend and basically it said that because 3 year olds still live in a world that is part reality part fantasy that they do not comprehend the concept of lying the way an adult interprets it. A lie to them is simply using their imagination to give an option of what happened. Could be part of the reason you get a blank I don't know look when you ask what happened.

For me it becomes an issue when the stories are told to get friends in trouble as in blame someone else because that takes imagination too far. At the same time that doesn't mean that a deed goes unpunished just that I don't pay a lot of attention to the stories. It becomes a case of dealing with facts. The rule was violated, the vase was broken, the friend was hurt. That is what you deal with not what the child said about it. In a way it is used as a chance to teach the difference between fantasy and reality.