The Diabetes Research & Wellness Foundation spent more than £900,000 of its £1.1m income on fundraising costs in its first year.
The organisation, which provides research grants, awarded only £29,600 in grants in the same year.
The Charity Commission inquiry attributed the high costs to a mailshot that asked people to take part in a sweepstake in return for being entered into a prize draw. Prizes included an MG sports car and a trip to Florida.
During the course of the investigation, the commission recieved complaints from 12 people who said the scheme was improper for a charity.
The commission criticised the charity for misleading donors by claiming grants had been awarded when they had only been pledged.
The foundation, which employs eight staff, reduced its fundraising costs to 43 per cent in 2003, when the inquiry ended.
Sarah Bone, executive director at the foundation, said it had since reduced costs further to 34 per cent.
"Publicity like this is not great," she said. "We want to retain public confidence."
Bone, who succeeded James Rogers when he left to join a private company last year, criticised the commission for taking a year to publish the results of its inquiry.
"It would have been a lot better to have had the inquiry published sooner rather than later," she said.
Chris Kiggell, a spokesman for the commission, said that in the interests of accuracy it wasn't unusual for inquiry results to take a year to be published.
He added that the commission did not set a target for fundraising costs and that it had started the investigation only because it became aware of irregularities in the charity's accounts.
The Institute of Fundraising said it did not issue guidelines on what percentage of its income a charity should spend on fundraising.
"There is no such thing as one size fits all," said Megan Pacey, the institute's director of policy and campaigns. "Charities are not homogeneous.
Charitable organisations need to invest in sustainable income streams, so the amount they spend on their fundraising costs will vary from year to year."