I don't really see how reporting your friend would affect you. If she carries on she'll probably get found out, but you don't need to be the one to do it. She could end up in so much trouble - could you really live with that? You don't have to agree with it but to actually go behind her back and report her...personally I wouldn't even do that to my worst enemy, let alone a friend. I'd rather concentrate on my own life than poking my nose into someone elses.
I am a single mum on benefits, no contact with the other parent so no help there. And here's a confession; I do some casual part time work from home for a friend's company for which I get paid cash. And I've got a goldfish not a pony! Without this extra cash, there are some things - and I admit, non essentials - I could not afford, for example: going to dance classes, meeting other mums for coffee at indoor playcentre, hopping on tube/bus to visit family regularly or taking my son to museums/farms etc., buying birthday/christmas presents for others, shop in Sainsburys without a calculator so that I'm not caught short at the till, fridge never empty, going out occassionally with friends/family for birthday celebrations, having birthday party for ds, inviting anyone to my house for a meal....etc.
So, yes, my friend could report me too, but she doesn't because she can see that even without bigger luxuries (eg. holiday, car) these little things make all the difference in my life. I need to have a bit of a life of my own, so that I can be a happier mum, and for that, I do need a bit of money for hobbies or for going out occassionally. When I look in the fridge and it's empty, or I have to turn down an invite to a birthday party for my ds because I can't afford a present - sorry, I can't help it, it just depresses me. I feel like shit when my ds questions me about those things. I hate borrowing money from friends and family when I'm caught short because of an unexpected expense.
So in order to have a better quality of life, not a luxurious one, but one where I am not counting pennies or fretting about money, one where I can do normal things like my friends can, I earn a bit of extra cash. It's not ideal and it's temporary but I'm very grateful for it.