Leading Birmingham arts organisations have been given a sixmonth deadline to justify £5 million in subsidies they receive from the city council.
Cabinet culture member John Alden ordered a comprehensive review into the funding arrangements of a dozen major institutions, including the City of Birmingham Symphony Orchestra, the Birmingham Royal Ballet, the Repertory Theatre, the Midland Arts Centre, The Drum and the Ikon Gallery.
The organisations have been told if they refuse to open their books for inspection they risk losing funding. They have also been advised by Coun Alden (Con Harborne) to consider cost-cutting through " efficiency savings".
Coun Alden approved a 2.1 per cent increase in arts grants for 2005/06, but pegged the award to six months.
Payment for the second half of the year is dependent on the outcome of the review.
Coun Alden shrugged off Labour claims that the review was the first step towards cutting funding. Some organisations might find their grants reduced but others could end up receiving more money, he said.
Describing his tactics as carrot and stick, Coun Alden added: "It could be that the organisations don't co-operate with us. I am sure that won't happen, but it could.
"Until we have carried out a comprehensive review I have no idea whether they are crying wolf or whether they genuinely need the money. The more money they get, the more they spend.
"It could be that some organisations such as the CBSO require additional funding. We need sufficient information from the organisations to carry out our review but we cannot force them to cooperate.
"We might say 'we are sorry but if you don't provide the information we need to complete the review we may have to consider a small financial penalty'."
Coun Alden would like smaller arts organisations, who receive no council money, to be given funding in future. He blamed the previous Labour administration for reducing arts grants in the late 1990s, including a £200,000 cut in funding for the City of Birmingham Symphony Orchestra.
Labour opposition leader Sir Albert Bore said he feared the arts would be "short-changed" by Coun Alden.
Sir Albert (Ladywood) added: "These major organisations, such as CBSO, Birmingham Royal Ballet and the Midlands Arts Centre, make a substantial contribution to the cultural life of the city, and raise Birmingham's profile on the international stage. The administration seems to be dealing with them at arms length, rather than treating them as partners of the city council."
Keith Longmore, communications director at the Birmingham Royal Ballet, said he believed the organisation's £900,000 council grant was safe.
He said: "We are not at all concerned because we think we represent excellent value for money and the review will demonstrate that."
CBSO chief executive Stephen Maddock said: "Birmingham has been a consistent supporter of its arts organisations and we are keen to have a constructive dialogue with the council."
Other organisations subject to the review are: Birmingham Opera Company; DanceXchange; Ex Cathedra; Birmingham Contemporary Music Group; SAMPAD; Audiences Central and Fierce Festival.