Short answer
Yes, there is a difference between hearing and understanding sound.
Background
Acoustic information is processed in different neural centers along the auditory pathway. The auditory system runs from the peripheral end organ in the inner ear (the cochlea) to the cortex. Along the way various processing steps are carried out. For example, basic reflex behaviors in response to acoustic stimuli (e.g., startle responses) are processed in subcortical structures (Bocca, 1985), while complex sound perception, such as listening to music, is mediated in the cortex (Philips & Farmer, 1982).
Source: New York University
It is not until the cortex that complex sounds such as speech are processed into meaningful information. The difference between hearing and understanding sound is strikingly evident in people with lesions in the auditory cortex.
Damage to the auditory cortex can result in an inability to recognize complex sounds and in a loss of speech understanding. These symptoms are referred to as agnosia or cortical deafness (Rosati, 1982). The loss of speech understanding (word deafness) is the most debilitating and therefore most investigated aspect of agnosia (Philips & Farmer, 1982).
However, tone audiograms (i.e., tonal hearing sensitivity) of people with cortical deafness are largely unaffected (i.e., their auditory thresholds are fine) and they may have normal sound-intensity and sound-frequency discriminating abilities as well (Rosati, 1982). Hence, the auditory cortex is thought to fulfill a synthetic function, in that it integrates complex sounds such as speech in time (Bocca, 1985). Word deafness may therefore be comparable to hearing a strange language, or hearing reversed words being spoken; one can hear it, but not comprehend it (Rosati, 1982).
It has been shown that the auditory cortex is crucial in storing information as well as processing of sound stimuli with rapidly changing content (in the order of milliseconds to tens of milliseconds). A loss of storage capacity and the loss of the ability to analyze rapidly changing acoustic signals are thought to at least partly explain the detrimental effects of auditory cortex lesions on speech understanding and other auditory abilities (Philips & Farmer, 1982).
References
- Bocca, The Laryngoscope 1985;68:301-9
- Philips & Farmer, Behav Brain Res 1990;40:85-94
- Rosati et al., J Neurol 1982;227:21-7