Follower of the Way
Good question. And I appreciate you asking it in a fairly neutral manner. I find D&D doesn't handle completely extemporized combats very well regardless, but that's sort of a dodge non-answer. So, I'm going to assume this isn't "DM inventing entire monsters from whole cloth," but some other kind of thing.What difference to you draw between fudging and extemporising? Is (in your mind) the latter adding something arbitrarily to the fiction or situation, and the former altering the result of a game mechanic?
Overall, I think my answer would be a qualified yes? While it's necessarily much more of a grey area, I very much do expect DMs to avoid certain kinds of "you thought you had a choice but you didn't" worldbuilding. So, for example, I have criticized very strongly the "quantum ogre" or "quantum haunted house," where the DM ensures that, no matter which direction the players choose to go, the ogre she intends for them to fight or the haunted house she intends for them to visit will be located there.
But if, for example, the DM were simply rolling with the players' choices, and they happened to go looking for a haunted house and said DM was just mocking things up really super quickly, then yeah, in absence of further details, that sounds pretty much just fine to me, so long as the extemporaneous additions are reasonable extensions of the already-established fiction.
To put it a different way, things that "already exist" (for a given definition of "exist") can be learned about. There is already a "fact of the matter," so to speak. (Again, recognizing that these are facts "within the fiction.") Things that are in the process of being invented, there isn't yet a fact of the matter, so I'm comfortable with that needing to be generated as opposed to altered--though it is certainly possible to generate things abusively.
I feel exactly the same way about retconning established story beats: that is, don't do it secretly, instead making sure that the PCs can potentially find out, even if they neglect to do so or make an attempt but the attempt fails. Part of the fun of a mystery story, for example, is that there IS an answer to "whodunnit" or the like, and you just have to figure it out. Having a mystery where the author decides midway through the book that no, the person who was guilty before is actually innocent, so now all those clues you read about before are fake is pulling what I would call the written-fiction form of "fudging," secretly altering stuff already observed and denying the reader even the potential to know that this has happened. It cheapens the mystery and reflects poorly on the author, implying they don't fully respect their readers.