I have a Synology 212j running the latest DSM 4.0 firmware. Embedded album art in FLAC files is not recognised but an image file in the same folder is. Make sure that the media server settings in DSM are correct. In the media server window, go to the browser settings tab and check the box next to the "Set images with the below filenames as music/video cover". Note that the filenames in the list are case-sensitive; so, if the list includes "folder.jpg", it will not recognise "Folder.jpg" (or "folder.jpeg" unless these names are also included in the list.
The only problem I have had is that the full resolution image file does not appear in n-stream. I normally use 500x500 images and the displayed artwork is clearly lower. Bizarrely, if I check the box marked "Transmit low resolution images instead of the original images" the the displayed artwork is a higher resolution (but still not as high as the original). This appears to be a problem reported by Synology users for various media players but I have yet to find a solution.