The leveling system worked perfectly fine. The scaling system worked perfectly fine. The problem was that the two, when combined were utterly broken. The problem basically is this: the leveling system rewards players for using abilities. Thus a player can decide at some arbitrary point that they'd like to use a mace rather than a sword (for example) and simply pick one up and go to work. This however introduces a problem: since enemies scale, suddenly you're all but incapable of harming the most basic foes and combat becomes incredibly tedious.
This special case isn't even the end of it all. If one plays the game as it desperately wants you to play (as a sword wielding heavy armor wearing dude who uses magic for little more than healing) you will naturally level up 6 distinct skills: blades, heavy armor, block, athleticism, armorer and acrobatics. This unfortunately means that, at certain points, you are suddenly ill prepared to face common foes (generally at intervals of five as this is when enemy types dramatically improve. Wolves become timber wolves for example). This leads to absurd spikes in difficulty when suddenly enemies take dozens of your most powerful swings to take down while you can only sustain a few yourself.
There are certainly ways around this problem of course but this demonstrates the real flaw of the systems. Players simply become less concerned with playing the way they want to play (the premise of the leveling system in the first place) and instead seek options that more or less break the game. A stealthy marksman with decent alchemy and chamelion armor can literally beat the entire game without once taking a hit and can kill almost any foe in a single shot (either from the fact that you deliver hundreds of pure damage with the arrow or because of the significant health drain over time from a strong poison). Someone can manipulate the magic system to the point that single spells that can be cast as often as they want are capable of delivering thousands of points of damage.
Worse still, the game continues to level enemies long past the point at which the player stops improving in their abilities. At best armor will absorb 85% of damage delivered and the most powerful sword in the game delivers a mere 45 points of damage in a swing. If one keeps playing the game long term, they are eventually forced to exploit the various systems in order to compensate
Between the two systems we see a fundamental failure in both. Scaled enemies do not offer enhanced difficulty: they simply force exploitation. The leveling system does not offer freedom of choice, it simply lets the player freely exploit. The player is thus left with two choices: play the game honestly and be annoyed by tedious (even if you don't find it difficult, that it might take more than a minute to defeat a common enemy is rather dull) nature of combat or exploit the game and be rewarded with a world devoid of any danger.