I honestly never heard it mentioned until last season.
This is a competition to find the best singer in America. So when bad signer auditions for this competition and is told that they are moving on to the next round, they must secretly think "I'm going to audition for the judges, so I've got a chance to be the next American Idol". And I'm sure the producers know what the bad singers are thinking when they are told that they made it to the next round. So whether it is intentional or not, in my mind if they don't flat out say "you really stink, but it makes for good TV so we are sending you on", that is no different than lying to them and telling them that they are good.
I don't mind people going on TV to make fools of themselves. But they are unknowingly being made the butt of a big joke and that just seems wrong to me. But again, if they are told in advance that they are really bad but Fox needs about 45 minutes worth of clips of bad singers to draw in viewers and they still agree to go on, then more power to them. And if that is the case, I'll take it all back. But based on the reactions of some of the people Simon lays into, I really doubt that is the case.