Being honest without screwing your kid up!

What happens when a child is exposed to adult sexuality? Nothing good can come from it. I'll start by explaining the child and parents in question here. Its my cousin and she has a 7 year old boy and her basic parenting philosophy with that boy is "If we want him to be honest with us, then we have to be honest with him." To her that means, leaving sex toys out in the open, leaving dirty magazines like playboys out so he is free to look at them, and watching very sexually explicit shows or movies regardless of wether is can see or not. Because a 7 year olds brain cannot register sex in a way that adults can this has caused some very bad behavior in the boy. Including molesting his friends. One by one other childrens mothers have seen him touch their child inappropriatly and even some of the children have come forward and complained that the didn't like the way he wanted to "play". And while my cousin is hearing all of this she thinks everyone is over reacting and blows it off with "kids will be kids". What will happen to this boy? Is he doomed to grow up a sexual deveant? All because he parents are too selfish to change their ways and too blind to realise the damage their doing to their son.