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Drywall SHALL not be used in wet location , building officials have every right to stop non-compliant work!
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That's a yes but... drywall as defined by astm blah blah blah. There's glass mat and fiber reinforced gypsum panels both approved as backings for tile in wet areas. Kerdi is about the best method and is approved for wet areas with regular sheetrock as it's solid backing in such areas, even in commercial steam room applications. I'd love to meet a building inspector who really did know code and stopped things when he saw things that were wrong. I'd certainly show up on a job with a shower liner flat on the floor a whole lot less often. Unless an inspector sees lamp wire coming from the circuit box or only 10 screws per sheet of drywall, or a joist cut almost in half to accomodate a soil pipe, they are not likely to say a thing. I wish it were not the case and the hacks out there know it.