Referencing means to refer to something, which usually means you're drawing information from it. The example I use is a library. When you're writing a paper you go and you refer to a lot of books to inform your essay, and you may even quote them directly. But would you expect to be able to just copy out an entire book, and call it a reference?
Likewise, when you refer to other images to inform a wider original composition, you're referencing. If you reproduce an image, you're copying. That can be completely okay too, though. As long as the person you're talking about was using the image legally then she hasn't really done anything wrong.
The latter is definitely tracing, and not recommended unless time is of the essence. Referencing itself varies greatly; it can range from gridding up an image to simply using a photo to work out how certain lighting effects work. A good example is a painting ~DonatoArts did of a woman in a red metallic spacesuit; he used photots of Christmas tree baubles and stuff to reference how the highlights on the suit would work [link]
I consider a reference any image that I'm using to create an image, whether it's a photo, artwork or even something written...anything that didn't originate in my head, but helps me achieve the image I'm going for. Reference material is information...for me almost always visual...how do muscles look in a certain pose, how feathers look if a bird is doing a particular thing or you're seeing it from a particular angle. I don't consider a model a reference- I'd call drawing from a model drawing from the source- the actual thing. A photo of the same model in the same pose- reference material. For my own sense of integrity, if I'm referenceing another artist's work heavily in something I do, I say as much...if not in the title, then certainly in my comments. Even on original work...just beneath the image, I put the title, after so & so if I borrowed heavily from them, my signature & the intent to copyright symbol & the date.
A reference should help you in image creation not be a crutch for it. I use reference in my work, usually of locations i want to use as a basis of the painting. The image changes though as i work and my use varies. I might only use a small part of a reference or i might use it to help me with composition or colour choices. I never use it to just copy a scene its just there as an aid to creation.