No it does not have to be covered in fondant. The problem with using your basic butter cream is that it is a food product and will start to mold and grow bacteria. It is possible that you can add an acid (like citric acid) to your frosting, and that will delay/stop the growth. I have found that if you use dry wall compound you will get a realistic look and it will dry hard and long lasting. Check your local big hardware store and look for either your basic light weight wall filler, or the ultra light weight stuff for more of a whipped frosting look.
Whatever you do, don’t eat it. It will put a taste in your mouth that no amount of milk will fix.
I would love to hear other opinions on this subject as well.
Robert